Jonathan Armitage is the Chief Investment Officer at MLC. Jonathan assumes overall responsibility for the investment outcomes of the MLC portfolios.
This article will examine considerations for advisers, when giving insurance advice to women of child bearing age.
This article is for educational purposes only and is no longer available for CPD hours.
Women now make up more than half the Australian population, have longer life expectancies than men and play a leading role in household spending decisions.
However, they only make up around one-third of policy holders for individual life and disability insurance, and have lower average sums insured.*1*
These facts are even more surprising when considering workplace participation statistics. Women make up 45.8 per cent of the total workforce, including 53.3 per cent of professional workers.*2*
It may be that as women are more likely to exit the workforce, or at least work part-time, when dependent children are young, and this coincides with a crucial need for insurance, that the main breadwinner in the family is considered a higher priority at that time for cover.
But when doing the sums, advisers often find that the cost of replacing someone to provide childcare, transportation, household cleaning and cooking, along with family management, can be higher than replacing employment income.
One of the most misunderstood areas of insurance advice is pregnancy and its implications for existing and new cover.
Eligibility of cover for expectant mothers
Life and trauma cover
Life and trauma insurance are the simplest of cover types, as eligibility is not based upon work status. Therefore, whether or not someone is working will not be a deciding factor.
For Life and trauma benefits, unless there has been a history of complications, cover will usually be considered at standard rates. Where there have been serious complications in either a previous pregnancy or the current pregnancy, an Extended Medical Attendants Report (EMAR) may be requested.
Note that this does not include side effects of routine screening tests or procedures, such as a caesarean section.
Therefore, unless there is a history of serious complications, pregnancy should not be a factor in whether or not cover is available.
Total and permanent disability (TPD)
For TPD benefits, like Life and trauma, unless there has been a history of complications, cover will usually be considered at standard rates.
However, if the client is more than 30 weeks pregnant (or for some insurers defined as being in the third trimester), then attaining cover may be more limited.
Some insurers will not approve TPD under an Any Occupation or Own Occupation definition, instead requiring the policy to be issued with a Home Duties TPD occupation. Others may not offer cover, or will defer a decision until after the birth.
Income Protection is usually available for employed expectant mothers up until the 30 week or third trimester mark (depending on the insurer).
Once past this point, most insurers will not offer cover and will defer a decision until after the birth and the mother has returned to employment.
Existing cover, parental leave and ceasing work
Any changes to policy terms and coverage for periods of leave must be spelt out in the policy document for the policy in question. This means that every policy can be different.
Life and trauma cover are generally unaffected by periods of unpaid leave or exiting the workforce, as these cover types are not linked to employment.
Total permanent disability (TPD) policies can remain in force, however, the definition that now applies may vary. Policy terms can include:
No change to definition – the insured continues to be covered by Own Occupation TPD, which is assessed based upon the insured’s most recent occupation
Own Occupation reverts to Any Occupation when the insured has been unemployed for 12 months or longer or
The insured’s occupation may be assessed as ‘Home Duties’ and therefore a Home Duties definition could apply, even though cover was put in place as Own or Any Occupation.
Most insurers do not treat maternity leave as unemployment, unless the insured has ceased work entirely with her employer.
Income Protection policies will be affected by the contract type, along with clauses that allow definition changes. Advisers should take note of the following:
Agreed or Indemnity: If Agreed Value, the cover level is locked in, therefore, periods without income will not affect a claim. If indemnity, a claim will be based upon 75 per cent of pre-disability income. Periods without income can mean a claim is lower or non-existent.
Pre-disability earnings (PDE): Whether Agreed or Indemnity, this definition is important, but more so for Indemnity policies. As Indemnity policy claim payments are made based upon 75 per cent of PDE, the wider the period of time PDE is based upon, the more generous the policy.
PDE definitions may refer to ‘the last 12 months of income prior to claim’, ‘the best 12 consecutive months of income during the last 24 months prior to claim’, or ‘the best 12 consecutive months income during the last 36 months prior to claim’.
Some policies also specify that unpaid leave is not included in the time period.
If a policy only allows for the last 12 months, periods of unpaid leave, including maternity leave, may reduce the claim possible.
Jillian earned $80,000 per annum in 2013, $82,000 in 2014 and then was on unpaid maternity leave in 2015.
Towards the end of 2015, she becomes disabled, and needs to make a claim. Her policy is an Indemnity contract, with a PDE definition of the last 12 months of income.
As Jillian has not earned an income for most of this period, her claim will be significantly lower as it will only be based upon anything earned during this time.
If the policy had a wider definition of PDE, the claim could have been based upon her 2014 earnings.
Superannuation ownership: Super-owned policies must comply with superannuation law, meaning the definitions are often more restrictive.
One principle is that the trustee can only release claim proceeds to the insured, in the event they have ceased work due to disability.
It could be argued that individuals on parental leave cannot meet this requirement as they have already ceased work, and therefore policy terms may be aligned with this interpretation. It will depend on the definition as to whether the policy terms define parental leave as unemployment.
Generally, this is not a problem with super-linked IP policies, as the non-super policy allows for a benefit to be paid. Super policies often tend to have more restrictive definitions of PDE, although not in all cases.
Pregnancy exclusions: A standard IP exclusion is for normal pregnancy, uncomplicated childbirth or miscarriage. Some policies will exclude these conditions without a time qualification, while others will exclude pregnancy-related claims within 90 days of giving birth.
The exclusions are generally not designed to exclude unusual serious illness or injury that may occur during this period, but rather some of the more common injuries and illnesses which can take place.
For example, if the insured was recovering from an uncomplicated caesarean section which meant she was disabled for six weeks after birth, this would not usually be covered.
Guaranteed renewable: Although uncommon, there are policies in the market, which are not guaranteed renewable in the event the insured has not worked for 12 months or longer. The policy may have a clause which allows the insurer to cancel the policy in this circumstance.
The difficult part about this for the insured is that they will only find this is the case if they attempt to claim, as the insurer has no way of knowing if the insured is working or not while the policy is in force.
This clause can generally be found in the section ‘When does this policy cease’ or by checking research software, such as Risk Researcher under the ratings provision, Guaranteed Renewability.
Premium waiver: There are two types of premium waiver, which may be available. The first will generally be titled,’Pregnancy Premium Waiver’ and entitle the insured to have premiums waived for three to six months for each pregnancy. The policy remains in force during this period, but premium relief is provided.
The second is a Premium Holiday or Policy Suspension. This benefit allows the policy to be put on hold, rather than cancelled, for up to six months in the event of parental leave, other unpaid leave or periods of unemployment and/or financial hardship. The downside is that the policy is not in force during this period, meaning that any injury or illness that occurs during this period of cover suspension will not be covered.
Particular benefits for complications of pregnancy
A small number of insurers have specific benefits which can be purchased to provide a lump sum claim in the event of serious pregnancy complications and congenital abnormalities.
These benefits are usually either included in or are optional benefits for trauma cover. These benefits will cover three types of events:
Complications of pregnancy which lists complications such as eclampsia, ectopic pregnancy or disseminated intravascular coagulation. Note – although the category is ‘Complication of pregnancy’, the benefit is not open-ended. One of the listed serious complications must occur.
Congenital Abnormalities which provides a benefit in the event the child is born with one of a list of abnormalities. These include the absence of a hand or foot, blindness or deafness, Down syndrome and spina bifida.
Death benefit in the event the child dies during or shortly after birth, or is stillborn at least 20 weeks into the pregnancy.
Cover usually has a 12 month qualifying period, similar to many health insurance policies. The cover is also limited to certain ages, with entry expiring at age 40 and coverage at age 45.
Although the benefit is attached to or part of a trauma policy, the payment is lower than the sum insured. For one such cover, the claim amount is $50,000 for complications of pregnancy and congenital abnormalities, or $10,000 under the death benefit. In another, 20 per cent of the sum insured up to $50,000 is payable in all of the above listed events.
Most advisers will be familiar with Home Duties TPD and Income Protection policies.
While these policies have a place, it should be noted that the definitions are generally more difficult to meet than occupational TPD or Income Protection.
Therefore, if TPD (Any or Own) or Income Protection policies are already in place, they should not be replaced with Home Duties policies, unless the cover has become invalid.
If no cover is in place, Home Duties policies allow cover to be taken out, which will ensure household help can be funded in the event of disability.
Home Duties TPD definitions require that the insured be unable to perform their normal household duties, and is unlikely to be able to again. An example of a normal household duties definition is as follows:
Normal household duties means the household duties normally performed by a person who remains at home and is not working in a regular occupation, including part-time and/or voluntary work, for income. Normal household duties include:
Cooking and preparing meals “” meaning the ability to prepare meals using basic ingredients and kitchen appliances
Cleaning the house – meaning the ability to carry out the basic internal household chores using various tools, such as a mop or vacuum cleaner
Washing and drying clothes – meaning the ability to maintain the household’s laundry by using the washing machine and being able to hang clothes on a washing line or clothes airer
Shopping for groceries – meaning the ability to physically purchase general household grocery items with the use of either a shopping basket or trolley
Looking after children – (if the insured person does this as part of their everyday activities at home) meaning the ability to care for and supervise children up to the age of 12 years, including the preparation of meals, bathing, dressing and getting the child to and from school by car or walking.
It is important to note that Home Duties TPD definitions usually require that the insured cannot perform all of their household duties.
Home Duties Income Protection policies are less common, but are more likely to result in a claim, as the insured does not need to be permanently disabled.
As an example, if the insured was in a car accident that resulted in physical disability for a period of six months, but then recovered, a Home Duties IP policy could provide coverage, where Home Duties TPD would not.
Home Duties IP policies generally cover up to $5,000 per month, for a two year benefit period. In the event the insured is unable to perform their normal household duties due to sickness or injury for longer than the waiting period, a claim can become payable.
It is generally agreed that unlike other forms of Income Protection, Home Duties IP premiums are not deductible to the policy owner. This is because the policy is not linked to paid employment, and not protecting any income.
When considering insurance for women, attention often falls on homemaker policies. While these have a role, putting comprehensive cover in place before the childbearing years results in more comprehensive cover over any time spent out of the workforce.
With this in mind, it is important not to forget that women are spending less time out of the workforce than ever before to raise families and that this only forms one life stage.
At more than 50 per cent of the population, advisers cannot afford to ignore this segment of clients. Smart strategies can ensure comprehensive cover that changes and adapts over your client’s lifetime.
Katherine Ashby, Senior Product Technical Manager, Life Insurance, BT.
Source BT Insurance.
ABS (2015) Labour Force, Australia, Detailed, Quarterly, Feb 2015, cat. no. 6291.0.55.003, viewed 8 April 2015, www.abs.gov.au/ausstats/abs@.nsf/mf/6291.0.55.003
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