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Category Life Insurance

Protect your income first

20 October 2021 Gareth Stokes

The significant increase in the frequency of life insurance claims through pandemic has forced South Africa’s financial advice community to reassess clients’ risk portfolios and ensure both adequate levels of cover and appropriate cover types. One of the truths revealed during FMI’s 2020 claims experience presentation is that income protection is more important than ever. The life insurer, a division of Bidvest Life, reported the highest number of claims in its 26-year history, up by 17% compared to 2019. Minor infections, which included Covid-19 infections and complications, were the main contributor to income protection claims for the year, accounting for 31.2% of the total.

Being single-minded about protecting income

“It is important for us to share our claim statistics with our main stakeholders … to instil confidence across the industry that we do pay claims,” said FMI’s Chief Product Actuary, Leza Wells, during a media event to announce the insurer’s 2020 experience. “As we reflect on our claim statistics each year we [are able to relive] our philosophy of being single-minded and clear about protecting income”. One of the key observations during the presentation was that income protection cover was more flexible than lump sum disability or critical illness cover, in that it was easier for insureds to qualify for a pay-out. 

The life insurance product landscape is dominated by life cover, disability and severe illness lump sum covers, and finally income protection cover. “Any short term injury or illness could jeopardise some of the financial plans that you have in place; our view is that if you can replace your income in your time of need, you are able to pay for other financial obligations such as short-term insurance, medical aid, gap cover and savings and retirement policies,” said Wells, explaining why FMI sells five times more income protection than other insurance covers. FMI’s statistics must be unpacked in light of the dominance of income protection covers in its portfolio. 

In fact, 87% of all claims paid during 2020 were for income protection policies, compared to 3% for life, 3% for critical illness and fewer than 1% for disability. The remaining 7% of pay-outs were for other benefits, such as retrenchment cover. A contributing factor to this income protection ‘skew’ is that it is easier to meet claims definitions on such policies compared to lump sum benefit policies. The risk, said Wells, is clear… Far too many advisers or clients focus on lump sum critical illness or disability in the hope that they will be able to use the lump sum pay-out to replace income; but in practice it takes too much time for policy conditions to be met. 

Busting the waiting period misconception

FMI paid 92% of the claims received in 2020, with 8% being rejected. This sounds high, until the reasons for such rejections are examined. According to Wells, the main reason for rejection during 2020 was that claimants had not met the waiting period conditions on their policies. It is important that your clients understand the different interpretation of waiting periods in an income protection versus general insurance context. In the former, the waiting period refers to the number of days you must be off sick before the cover kicks in, typically seven, 14 or 30 days. In the latter, waiting period refers to an initial period after the policy’s inception for which the insured is not on cover. Non-disclosure stood out at the second largest contributor to FMI’s 2020 claims rejections. 

“We take the claim rejection lessons back into our product development and product innovation; but also share them with advisers and policyholders so that their awareness around the product increases, and we can have a clear focus on changing perceptions and behaviours to have a better claims experience in the future,” said Wells, before reflecting on the main reasons for claims during pandemic. 

Minor infections, mental illness and cancer were the top three causes for both genders. Of greater interest is that only two of the top 10 causes that kept people from work, and thus qualified for an income protection pay-out, would have triggered a pay-out on a lump sum disability or critical illness policy. Despite this, the majority of policies sold in the industry during 2020 did not include income protection. Industry wide statistics show that lump sum life cover accounted for 61% of new life policy sales in 2020, with lump sum disability and critical illness accounting for a further 32% and income protection a mere 7%. 

Short duration claims dominate

For 2020, the average income protection claim duration was 78 days, with 80% of all claims being less than 90 days in duration. And fewer than 3% of FMI’s claims span for periods longer than two years. “Someone with a 30 day waiting period, or a 90 day waiting period on some of the group risk covers, will only receive a pay-out after [they have been off work] for that waiting period,” commented Wells. “Meanwhile, we are seeing 80% of injuries and illnesses occurring for a really brief period of time”. FMI does pay longer claims, with the average duration for a stroke being around 300 days. But it was noted that damage following a stroke does not have to be permanent and may not always result in a full lump sum disability pay-out. 

“Covid-19 has had a major impact on the long-term insurance industry, with significant increases in claims for income protection, retrenchment, death and funeral claims,” said Wells. “Whilst we saw a higher than usual number of income protection claims, our exposure to the virus was limited because we have a newer book with younger ages that have been underwritten more recently”. Even so, the Covid-19 disease was the leading cause of temporary income protection claims, with an average claim duration of just 18 days. The majority of claims paid in this category were for policies with a seven day waiting period. This experience illustrates the need for self-employed workers to choose the shortest waiting period possible. 

Integral to comprehensive risk cover

Finally, financial advisers and financial planners were encouraged to include income protection cover as an integral part of their clients’ risk portfolios. “We have always believed that income protection cover should be the foundation of your financial plan,” concluded Wells. “Because even a short-term interruption in your income due to injury or illness can place your entire financial plan at risk. For us, financial planning should start by asking: ‘How will I provide for myself and my dependents if I get ill or injured and I cannot work?’” 

Writer’s thoughts:
On FMI’s version it seems fairly ‘cut and dried’ that your client’s income should be protected before worrying about their lump sum death and disability needs; but there are two sides to every story. We are sure that financial advisers will offer compelling arguments why lump sum cover is indispensable too. Why do financial advisers seem to favour death, disability and severe illness covers over income protection? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected]

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