Seth’s Blog on Finance

What is Disability Income Insurance?

Disability Income Insurance (DII) is a very specific type of policy with the intended purpose of insuring one’s ability to work. Much like the Aesopian goose, most Singaporeans produce their own “golden eggs” in form of the monthly salaries they receive for working. DII steps in to replace the lost monthly income when a person is unable to work due to accident or illness.

Income replacement is possibly one of the top most priority for working class Singaporeans after a hospitalisation plan, and many insurance policies are sold on this premise. However, as cliché as the proverbial goose analogy is in the world of insurance sales, many agents are not recommending DII policies, pitching life coverage in form of Critical Illness and Total & Permanent Disability as income replacement solutions instead. Let’s take a look at what DII does and why so many Singaporeans are under-insured in this regard.

Example of how it works

For 30-year-old Jack earning $4,000, he is able to insure up to $3,000 (75%) of his gross salary with a monthly premium of $86.30¹ until he is 65 years old. If, due to an illness or accident, he is unable to perform the material duties of his own occupation, the insurer will start to pay out $3,000 per month 3 months after his medical diagnosis of inability to work, and the payout will continue as long as he is unable to perform his material duties of his own job.

After 2 years since he is first unable to perform his own job, if he is still unable to perform the material duties of any occupation or profession to which he is suited by reason of his training, education or experience, he will continue to receive the payout. The payout also increases by 3% compounded every year.

In the worst case scenario of complete inability to work for the rest of his lifetime, Jack will stand to receive some $2.1 million over 35 years to replace the income he has lost due to the unfortunate accident or illness. A 35-year term policy of $2.1 million covering both Total & Permanent Disability (TPD) and Critical Illness (CI) will probably be too cost-prohibitive for someone earning $4,000 per month. Moreover, there are illnesses/accidents that can cause a person to be unable to work and yet not meet the definitions of TPD/CI in order to qualify for a claim. For example, one of the common claims for such coverage result from mental breakdowns.

Additionally, if Jack’s health improves and he manages to return to work after making a claim, but due to the same condition can only earn less than before, the DII policy will give him a partial payout every month (based on a formula). If he is now only able to earn $2,000 per month, DII will give him a partial payout of $1,500, making his total income $3,500 which is much closer to his original salary.

Comparison against CI/TPD coverage

Let’s take a look at a brief comparison between DII and CI/TPD coverage.

The relationship between normal CI and DII coverage can be further be shown in a simplified illustration (which does not represent any contractual claims scenario and dependent on specific circumstances):

While the two coverage seem to overlap on the area of income replacement, there are scenarios whereby a claim can be admitted under DII but not under CI, and vice versa. Someone who has a Heart Valve Surgery and meets the CI definition can claim under his CI policy, and has the option to stop work to recuperate. Depending on the circumstanecs, it may be likely that he is still deem to perform his material duties of his work and DII will not pay. On the other hand, conditions that are not Critical Illnesses may cause him to be unable to work, such as certain mental illnesses. For more specialized occupations like dentists, carpel tunnel syndrome may well cause them to be unable to perform their jobs. Lastly, there are also situations where both will pay out at once.

Hence, the two kinds of coverage must be coordinated to ensure comprehensive coverage at a reasonable cost. The problem is that most Singaporeans are exposed only to CI/TPD coverage (and even in this aspect may be under-insured), and many people may find themselves unable to work due to an unforeseen mishap and yet be unable to claim from policies they have purchased.

Even insurance agents are under-insured!

It may be surprising and richly ironic that a vast majority of insurance agents are under-insured in this area as well. Why? Despite all agents having to take the Health Insurance exam which covers Disability Income Insurance, most of them are unable to sell it to themselves because their companies do not carry it! Amongst the many insurers of Singapore, only two companies offer DII, ostensibly because the margins are low to the insurer (and reinsurer alike). There was once a third provider which has since ceased offering DII citing poor margins. Features have also been gradually removed in a frightening trend of insurers removing policies that are beneficial to increase their bottom-lines.

Since insurance is more often sold by insurance agents than bought by willing consumers, many working adults are under-insured in the area of DII for the simple fact that many insurance agents cannot sell it. Personally, I think it’s wise not to seek insurance advice from the under-insured.

Also, beware of “counterfeit” policies. I have seen some disability related products marketed seemingly to pass off as DII coverage. I believe it speaks volumes of the company’ lack of integrity when something like that is done. DII covers “own occupation”, unlike these inferior “pirated” plans.

1. Premium differs according to occupation, age, gender etc. Premium quoted is based on occupation Class 2