Ranking income protection before death and disability cover
Financial and risk advisers who want to stand out from the advising crowd in the complex life insurance distribution game would do well to adopt an ‘income first’ philosophy, and study up on product waiting periods. These messages were repeated countless times during an hour-long presentation introducing the Bidvest Life 2024 Claims Report.
Lump sum covers gain traction
The insurer, well known for its innovative approach to claims, product design and underwriting in the income protection space, also offers death, disability and severe illness cover. In fact, around 70% of new business premium generated in 2024 came from traditional lump sum insurance benefits. Those unsure of whether the brand sees itself as an income protection focused or life insurance focused provider will have to read a bit further.
After watching Bidvest Life Product and Pricing Executive, Nic Smit, talk passionately about the business through 117-odd slides, your writer was left somewhat disappointed with the absence of headline numbers. Even the post-event presser dealt in days, ratios and percentages, giving little insight into the value or number of claims paid in the period under review. Smit did, however, paint a colourful narrative of early aircraft design, likening income protection to the propeller, an essential component that was often overlooked by flying pioneers.
“The aim is not to bore you with dry statistics, but rather to challenge your thinking with some of the insights that we have drawn from last year’s claims,” Smit said, explaining the absence of hard numbers. On the plus side, he talked his virtual audience through a number of case studies that illustrate the practical benefits in the insurer’s product offering. Overall, the presentation positioned ‘income first’ across three components in the life insurance value chain, weaving in the necessary statistics to ‘sell’ the approach to the attending financial advisers.
Income first in financial advising
It makes sense to report on proceedings along the same lines, starting with the sub-heading ‘income first’ in advice. “Our youngest income protection claimant in 2024 was a 19-year-old student who had a 14-day claim for minor infection, and our oldest was a 69-year-old GP who had a 30-day claim for a wrist injury,” Smit said. Zooming out, he revealed that 11% of income protection claimants were younger than 30; 36% aged 30-39; 24% aged 40-49; 20% aged 50-59; and just 9% aged 60-plus.
The income protection by age data was then compared to death claims by age to reveal, not surprisingly, that younger clients have a greater need for income protection than death cover. “Every young person should have income protection from when they start working whereas they only need life cover once they have dependents that rely on them financially,” Smit explained. He shared statistics to show the average age at which people need this cover being on the rise. For example, the median age for grooms is up from 35 in 2014 to 38 in 2023, and for brides from 31 to 34. Your clients are waiting longer before getting married, having children or buying homes.
Financial advisers probably agree that ‘income first’ makes sense, but they argue that delaying traditional life insurance covers can result in clients being uninsurable due to changes in health. Smit said that Bidvest Life’s future cover protector (FCP) addressed this concern, making it possible for insureds to add lump sum death or disability cover up to five years later without medical underwriting. The presenter illustrated the benefit using quotes for a 30-year-old male, non-smoker, employed in an administrative role for income protection only versus (B) income protection plus FCP versus (C) income protection plus death and disability cover.
The all-important waiting period
Sticking with the ‘income first in advice’ heading, the presenter focused on the average claim duration for income protection benefits. “For 2024, our overall average claim duration for temporary disability was 71 days,” he said, adding that while this did not sound like a long time, it was an absolute disaster for those living pay-cheque to pay-cheque. Breaking the stat down, you discover that 19% of income protection claims were for 14 days or less and 17% for 15 to 30 days, meaning that a full 36% of claims would not have qualified on a 30-day waiting period.
“The waiting period is the most important decision that you make around your income protection policy up front and is something that should be given a lot of attention,” Smit said. “We need to challenge our thinking around 30-day waiting periods and salaried lives in the context of multiple claims.” The insurer has tried to make the seven-day waiting period available to as many people as possible. Another important observation is that unlike lump sum death and disability claims, and most critical illness claims, an income protection benefit can pay out for more than one claim while that cover is in force.
The case study shared here was of a 55-year-old female policyholder, Simone, on cover since age 39, who had made 14 claims against her policy. This was by no means an outlier, and Smit noted that 8% of the 2024 claimants had five or more income protection claims. Simone was in claim for 585 days, which translates to about 13% of the time that that policy was active. In an interesting comparison, moving from a seven day to a 30-day waiting period would have reduced the ‘in claim’ period to just 265 days; and adding back the 30-sick-days per three-year cycle only reduced the shortfall by 120 days.
Consequences of interrupted income
Smit’s plea to financial advisers and short-term brokers was to consider the impact of temporary disability events on their client’s incomes, and the resulting inability to fund long-term investment plans, or maintain short-term insurance premiums. He also mentioned the temptation that someone who is not earning an income experiences to draw down against their investments to manage their cash flow crisis, often with significant penalties and tax implications. “Income protection is insurance for your investment plan,” he said.
The second part of the presentation focused on ‘income first’ from a product design perspective. The presenter spoke about making income protection, or at least temporary disability cover, available to a wider range of occupations through events-based cover. “Event based cover is a way to ensure that people are still able to get cover outside of the things that make them traditionally uninsurable”, Smit said. Claimants in this space include a mix of professional athletes; professional coaches; entertainers; and manual workers. In 2024, roughly 10.5% of claims paid were to individuals who would have struggled to obtain any cover a decade ago.
The third and final lens explored the impact of ‘income first’ on life insurance operations. Given that claims performance is arguably the biggest driver of public perceptions of the industry, it made sense to begin there. Smit sliced and diced the claims volumes to compare product lines, revealing that the insurer paid 4.5 income protection claims for every critical illness claim rising to 15.3 income protection claims per death claim, and 43.1 per disability claim. Advisers were encouraged to partner with life insurers that could manage the sheer volume of income protection versus traditional life insurance claims.
Claims: where the rubber hits the road
The all-important claims pay-out ratio topped 90.4% of all lodged income protection claims for 2024. Smit listed the top three reasons for non-payments of claims as first, the period the insured was unable to work being shorter than the waiting period; in a distant second, non-disclosure; and third, exclusions applied at underwriting stage that the policyholder subsequently attempted to claim for. “The claims’ paid ratios do not tell you the full story because when it comes to income protection there is an urgency in that payment being made,” Smit said.
Bidvest Life’s fastest claim for 2024 was a conjunctivitis claim paid out to an optician in an hour and 20 minutes. Overall, 4% of claims were paid out in 24 hours; a third within one week; 48% within two weeks; and 74% within one month of being lodged. Of course, the claims cannot be paid before the waiting period runs out.
Writer’s thoughts:
The income protection before traditional life cover argument presented at the Bidvest Life 2024 Claims Report webinar is not new, it has been discussed for decades. Do you follow an income first approach, and if not, why? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
