Total and permanent disability (TPD) claims represent a huge portion of claimed payments in the life insurance industry, in particular with mental health claims. This has strained the industry, with $2.2 billion in retail mental health claims in 2024.
According to Marshall Ross, partner education manager at Acenda, the needs of clients are also increasingly complex, with cost-of-living pressures, co-morbidity issues where multiple disabilities co-exist, and stagnant wage growth, meaning any paid-out TPD claims need to cover more ground.
“We’ve got all these conflicts that people seeking insurance sit at the centre of around their protection needs,” Ross said.
“The challenge from an advice perspective is this balancing act that becomes harder to achieve the increasing need that clients now have.”
To mitigate this, Ross highlighted that advice needs to be “targeted” to help balance those factors, especially around TPD cover. This philosophy, according to Ross, needs to begin with a “conversation about risk and how we deal with that risk”.
“I’ve got all this risk that I am exposed to day to day,” Ross said, highlighting that only a finite amount of that risk can be insured. Furthermore, practicalities around the sums insured that can cover these needs and what an adviser can practically recommend to their client whittles down the coverage available.
Even though some of the original risk exposures after this “whittling down” process may not be part of the cover offered, Ross stated they still need to be part of the discussion.
“They still linger around the fringes and they still need to be discussed, even if they don’t form the final product,” he said.
Ross suggested that a strong risk philosophy guides clients through this process, helping them understand that perfection is difficult to achieve in TPD cover. He labelled this level of cover the “minimum effective dose”.
“The minimum effective dose is helpful. It asks, ‘How do we give someone the minimum amount they need to feel comfortable and protected from risk without exposing them to the side effects that may come with that?’” Ross said.
The minimum effective dose should also be informed by client goals and aspirations, such as retirement plans and savings targets, accounting for how this can be supported in the case of a TPD event.
However, as Ross highlighted, people will often think in worse-case scenarios, and while this is a “useful survival instinct”, it can create issues for risk advisers, potentially encouraging clients to push for TPD cover that is impractical and unaffordable.
“The way we approach dealing with this is through the concept of best estimates,” Ross said.
This approach centres on being “upfront and honest”, highlighting to the client that while worst-case scenarios are scary, the cover they settle on needs to balance a multitude of factors, giving them an estimate of what their cover may give them in a series of different scenarios.
“This is really freeing because it doesn’t position us as having an exact solution,” Ross added, explaining the process allows clients to understand that life insurance is more about peace of mind than it is insulating against every worst-case scenario.
