Seth’s Blog on Finance

More on Disability Income Insurance

There is some confusion between Disability Income (DI) insurance and insurance coverage that provides a payout for Total & Permanent Disability (TPD). Despite already writing a post introducing DI insurance before, I believe that more clarification is good to clear the air regarding such a policy that few people, including industry practitioners, are aware of.

TPD coverage is a lot more commonly explained as it is found in many insurance policies. DI insurance, on the other hand, is a very specific type of policy which coverage is markedly different from TPD but often conflated to be the same as they both seem to cover “disability”.

Here’s a table that specifies the different types of disability being covered and their typical definitions:

TPD coverage only provides cover for the most severe form of disability, which is where one cannot earn any income at all and such a condition must be diagnosed as permanent, or if the person loses the use of any two of his eyes and limbs. It can be inferred from claims statistics that the chances of claiming for TPD is relatively very small compared to that of death or critical illness. If you look at a term policy, the difference in premiums reflect the small risk to the insurer to some extent, eg. a 35-year term of $600,000 for a 26-year-old man costs $792 a year for the Death Benefit, and $90 a year for the TPD benefit.

Regardless of the chances of claiming for TPD, there is a big gap in TDP coverage for disability if one solely relies on TPD coverage. DI insurance includes the first two levels of severity of disability. The difference between one’s “own/similar occupation” and “any occupation” is very huge. Also, a lump sum payout may prove to be insufficient for long term disabilities, while a DI policy will pay out a claim as long as the insured continues to meet the claim criteria until the policy’s expiry.

Why are most agents not recommending this kind of policy?

Some of my views, amongst many other reasons:

• Unavailability of such a policy in the agent’s limited product range. Only two companies offer such a policy. (Of the two, one of them has a one-line contractual clause that has a huge averse impact. I personally do not dare recommend that particular one.)
• Such a policy affects sales of others. DI insurance takes care of catastrophic situations whereby the insured is unable to work for a very long period of time be it due to injury or illness (critical or not). Someone who sells this would find it difficult to persuade the client to buy a higher sum assured of pricier policies.
• Difficult to sell. Most people do not like to pay for pure insurance coverage, and the cost of insurance can be hidden in policies with cash value that appears to “give the premiums back” to the insured should no claim occur. Successful salespeople take the path of least resistance and it is not profitable trying to correct a prospect who prefers to give you better commissions.

There’s one reason that deserves quite an elaboration on its own: there is a perception that such insurance is difficult to claim on. This may be due to an agent not being able to recommend DI in the first place, or it could be a genuine misconception (which is why a competent financial adviser is a more appropriate person to look for). Some clients themselves may share this view.

On the contrary, such policies have rather strict underwriting to protect the insurer (and its re-insurer) – even minor health conditions can lead to exclusions and even rejection by the insurer (also perhaps why agents avoid this as it is too much of a hassle to transact). Certain occupations are also excluded altogether because of the high risk of a claim. On the other hand, white-collared office workers should not be overconfident in a fallacious belief that they are immune to being injured or ill until they are unable to do their jobs – in fact, one of the largest claims come from a white-collared person. In the first place, one’s occupation determines the premiums of DI insurance, and hence it is fairly priced according to the risk each person faces in his/her job.

Lastly, I want to repeat certain important points I have mentioned before on this blog – watch out for “counterfeit” policies of such nature, and seek qualified and independent financial advice for your fullest benefit.

Reference: Get Paid for Being Disabled