Covid drives income protection claims through the roof

Income protection claims spiked due to Covid in 2020, with claim volumes at one insurer increasing by 17% compared to 2019 and making up 87% of claims paid during the pandemic year.

Minor infection claims due to Covid-19 accounted for almost a third of the company’s income protection pay-outs.

According to life insurer FMI, a division of Bidvest Life Ltd, this was the highest number of claims in its 26-year history due to a sharp increase in temporary income protection claims related to Covid-19.

Minor infections made up 31.2% of all income protection claims paid with most of these for Covid-19 infections and complications. Covid was the leading minor infection.

Mental health claims, mainly due to anxiety, burnout and depression, accounted for 3.5% of all claims, the second-most common reason for claiming for income protection, Leza Wells, chief product actuary at FMI says.

Cancer was the third-most common claim, followed by rotator cuff repair, hysterectomy, tendonitis, synovitis and bursitis, carpal tunnel release, abscess drainage, lumbar spine fusion and gallbladder removal.

Apart from these claims, 7% were for additional benefits, such as retrenchment cover, while 3% were for critical illness and life cover claims and fewer than 1% for lump sum disability claims.

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Covid increased claims

“Covid-19 had a major impact on the life insurance industry, with significant increases in claims for income protection, retrenchment, death and funerals. While 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.”

She says the pandemic continues to show that income protection is still the most effective insurance against the risk of injury or illness.

“The payouts allowed policyholders to continue providing for their dependents and employees during a highly unusual year with many financial challenges.”

FMI paid 92% of all claims in 2020. Clients who tried to claim for income protection during the mandatory waiting period was the leading cause for the 8% of claims that were not paid.

The waiting period is the number of days a policyholder must be sick or unable to work before the income protection insurance starts paying.

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Income protection claims in numbers

According to the Claims Report:

• 40% of claims lasted less than 30 days, with an average duration of 18 days for Covid claims.
• Claimants with a seven-day waiting period accounted for 86% of Covid claims.
• 64% of income protection policies sold had a waiting period of 30 days or longer.
• The top five occupations for comprehensive cover were for business owners, financial advisers, medical doctors, hairdressers and beauticians.
• The top five occupations on event-based cover were homemakers, students, fitness professionals, sport coaches and animal-related occupations.
• Hysterectomies were the second-most common claim for females, while 20% of claims for women were for childbirth.
• The average period people claimed for was 78, while 80% of claims were for periods less than 90 days.
• The average income protection claim lasted 314 days for cancer and 367 days for stroke.
• Less than 3% lasted for the full benefit term.

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The importance of income protection

Wells says it is important to note that only two of the top ten claim causes for income protection were for conditions that would likely have resulted in a lump sum payout. Fewer than 1% of claims were paid on lump sum disability which shows that there are several injuries and illnesses that impact your ability to work that will not result in a claim for critical illness or lump sum disability cover.

What is worrying is that most policies sold in the industry during 2020 did not include income protection. Lump sum benefits dominate sales in the life insurance market, with life cover representing 61% of new sales.

Lump sum disability and critical illness sales accounts for a further 32%, while income protection makes up only 7% of sales, she says.

“We have always believed that income protection cover should be the foundation of your financial plan. Your monthly income pays for your short-term insurance, medical aid, lump sum cover, your savings and retirement plan. Even a short-term interruption in your income due to injury or illness places your entire financial plan at risk,” Wells says.