Clients wait longer for income payouts
Cost pressures are prompting increasing number of clients to take longer wait periods on their income-protection cover.
Tuesday, July 24th 2018, 6:00AM 
1 Comment
by Susan Edmunds
Russell Hutchinson, of Quality Product Research, which runs QuoteMonster, said it had been noticeable for the past couple of years that fewer people were taking four-week wait periods and most opted for 13.
“It reduces the cost quite a lot. It’s the most significant thing in terms of cost reduction that you can do with income protection, short of reducing the benefit term.”
It worked for clients who had a financial buffer, he said. Many could get through 13 weeks with a combination of sick leave and emergency funds.
About 40% of quotes were done on the basis of a 13-week wait, he said.
While income protection rates were steady, more people were opting for mortgage protection products, Hutchinson said. These are often used as a base level of cover for expenses, and topped up with income protection, because mortgage cover is not offset by ACC.
That top-up model was good from an advice perspective, too, he said, because if a client decided they could no longer afford the full cover, the could drop back to just the mortgage protection.
There was 40% more mortgage protection cover quoted in 2017 than in 2016, Hutchinson said. “We’re routinely seeing over 1200 cases quoted a month. The average annual premium quoted for income protection is just over $1600 per year, for mortgage protection that figure is just over $800 per year.”
It was still only quoted half as much as health insurance and a third as much as trauma insurance, he said.
“Which is reflected in the level of ownership in society as a whole – which is low. Yet in figures provided to us by consulting actuaries, we’re told that in a typical working life one in four couples will experience a period of six months or more during which a person is unable to work due to disability.”
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With those with mortgages, many existing contracts have provision for mortgage holiday's, and the newer mortgage contracts are subject to the consumer credit act, where lenders have to be reasonable about helping clients meet their obligations.
So when looking at many clients situations, considering the ability to put the mortgage on a premium holiday is a reasonable approach. The lenders are always keen to manage the situation of financial distress, and a disability does cause that quite acutely. When you can explain that the bank will get its money in 90days, either through the return to work of the disabled person, or the payment of an insurance benefit, they're quite happy to accommodate the request. Even in the toughest of LVR situations.
This results in the situation that a client is only exposed to the cost of this plan at the time of a disability if it happens in the form of an increased interest bill for the 90 days, rather than the immediate cost of the increased premium right now on the basis that it might happen which in the long term is substantially more cost.
In increasing the wait period, the client has substantial savings in this area and is more likely to take the cover knowing that the big stuff is covered and they will cope with the minor stuff.
Yes, I hear the most claims are back at work in 2-5 years, and that can be an additional premium management strategy later in life, for the younger ones, under 50, retirement is a long way away if they face permanent disability, so reducing payment terms is a fraught approach for an adviser.
I've had 3 in the last year, that have been TPD for IP purposes, 41, 23, and 51, and maybe another 51 year old that's in the middle of the assessment. So no, reducing payment terms to manage premium is not necessarily the best approach, extended wait periods are more effective.
The family will help out for a few weeks/months, but they grow tired of it if it is 20 years...