In general, we consider a life insurance policy as a must have to protect our loved ones if we were to pass away. Whilst this is true, there is much more to a life insurance policy than just death cover. There is an argument to be made that disability can be even more damaging to a family’s finances than death. For instance, you still need to eat, consume electricity (if its working), pay for medical treatments including nurses, caregivers etc. and these can have a bigger impact on your family than if you were no longer there. Therefore, it is just as important to consider disability cover when reviewing your life insurance policies.
On a life insurance policy, there are four main types of benefits that you can provide for: life cover, critical illness cover, income protection and lump-sum disability cover.
Income protection and lump-sum disability cover are disability benefits, which are designed to protect you in the event of you not being able to work. There are key differences between these two forms of disability cover which one must be aware of. Which of these two are more relevant to you, which one will trigger a claims event payment and is it worth considering a combination of both?
Let us begin by looking at the definition for permanent disability. It requires the PERMANENT inability to perform your own occupational duties. In certain instances, this definition set can be even broader and include the PERMANENT inability to perform your own or any similar occupation that you performed prior to the disability event.
Now, that is a mouthful and does not provide a clear indication of what needs to happen before a claim can be paid out. For certain occupations, the inability to walk may trigger this definition, whereas other professions may depend on one’s ability to present and project one’s voice may be of vital importance, even though some people in the office may disagree. By way of example, a managing Civil Engineer; whose responsibilities include being present on a building site to monitor and ensure that the correct steps are being taken to build a structure. Paraplegia would definitely prevent the civil engineer from working, but could the same be said for a software engineer? It can be argued that the software engineer is still able to work, as their main occupational function is typing out thousands of lines of code.
There are several cases that end up at the Ombudsman for this exact reason. An insurer might feel you are able to perform a similar job, but there are many factors to consider, such as education required, salary, experience etc. Most of the cases that have come before the Ombudsman have been in the favour of the client. Do we really need to endure such a process merely for claim finality/payment?
The good news is that some life insurers have taken steps to include a set of clinical definitions in place for disability, such as paraplegia, stage 3 or 4 cancers, and severe strokes to name a few. This helps to provide clarity on conditions, where disability will be established without having to prove that you can or can’t perform your occupational duties.
Now that we have covered the definitions and claim triggers, let’s consider how best to protect yourself and your family from a life-altering disability and unpack the difference between lump-sum disability payouts and monthly income payouts (income protection).
We have only discussed PERMANENT conditions, but what if the event only precluded you from working for a shorter period where the likelihood of recovery is high? If you have knee surgery and are off work for six weeks, or if you contract a serious illness that can be treated, and your doctor’s prognosis is that you will recover over time. This is where your income protection benefits differ from the lump-sum benefits.
Income protection can be broken up into two components, namely: the temporary portion, and the permanent portion.
Both of which pay a monthly income, but the criteria to claim on each differ substantially. On the temporary side, a medical doctor’s report stating that you are unable to work for a period of six weeks would suffice, and a claim payment of six weeks of your insured amount less the waiting period on your policy (which is usually 30 days in most cases) would pay out. It is important to check your policy documentation for your specific waiting period. However, on the permanent side, it requires that you either meet one of the set clinical claims requirements mentioned earlier, or an occupational therapist determines that it is unlikely that you will ever return to the workspace.
The temporary portion of cover is much more likely to pay out.
With medicines evolving and treatments advancing, there is a higher probability of you being booked off work and recovering than being permanently unable to work. This benefit helps to provide for the family, covering the monthly cost of living, while one of the breadwinners’ incomes may have reduced or ceased temporarily. We all wish our employers would grant us six weeks of paid leave a year, but that is simply not the case. This benefit does not come without a cost though as it is an expensive benefit, and this is typically why there are more lump-sum disability benefits sold in the market than income protection cover.
So, the question remains, which one should you use to protect your family best?
In an ideal world you would want a standalone temporary disability benefit, paired with a lump-sum disability benefit. This would mean that you are covered for the conditions you can recuperate from whilst also having the benefit of a lump-sum in the event of being permanently disabled. Some insurers are beginning to consider these options but not all are able to offer such a product. It is important however to consider your families specific needs and circumstances. So, I will say it again, please consult with a financial advisor who can define your specific needs before making any changes to your existing policies.
This does not cover all the complexities of a life insurance policy, which is why you should default to a dedicated team of risk specialists, who can assist financial advisors in providing the correct products for their client’s needs. This will ensure that from application, to underwriting and acceptance of policies is as smooth and pain free as possible.
At Harbour Wealth we have expert risk specialists, led by an experienced claims assessor, who assist advisors in driving the claim’s process in the unfortunate event of a claim arising.
*This article is not intended to be financial advice and should not be constituted as financial advice.You should always consult with your financial advisor when reviewing your life insurance policies.