When it comes to insurance, most people are familiar with the standard benefits like death, critical illnesses (e.g. cancer, heart attack) and hospitalisation. Yes, these are indeed important life risks that we ought to insure against. The financial impact can be disastrous if we die too early, not leaving enough for dependants’ living expenses or be saddled with huge medical bills from the treatment of serious illnesses. However, most people seem to have missed out one other important risk factor: disability.
If an accident or illness happens, resulting in our being unable to work, we would have lost one of our biggest assets – our income-earning capacity.
How much is the loss
Suppose a young professional, John Tan, age 30, earning $4,000 per month as an Accountant is now unable to work because of a car accident. He would have lost $1,680,000 that he could have earned had he worked till age 65. If we assume a pay rise of 3% every year, the loss of earnings would be as much as $2,600,000!
In insurance jargon, it is called the human capital – your biggest financial asset.
What is Disability Income Insurance
Disability income insurance is the only insurance that insures against your income earning capacity. For simplicity in understanding, the following are the benefits of this insurance:
1. If Insured is unable to perform material duties of own occupation, monthly income will be payable for the first 2 years.
Let’s assume John (above example) has bought a Disability Income insurance with a monthly benefit of $3,000. After the car accident, he is unable to work as expected of an Accountant. His insurance will pay him a monthly income of $3,000 after a waiting period of, say 3 months, for the first 2 years.
2. Subsequently, the monthly income continues to be payable if insured is still unable to work in a reasonable occupation by virtue of his/her training, education or experience.
After the first 2 years, if John’s disability still prevents him from working in any reasonable occupation, he will continue to receive the $3,000 monthly benefits for up to age 65. Some disability income policies provide a 3% annual increase in monthly benefits for taking care of inflation. If John’s policy has such a benefit, his subsequent year’s payout would be $3,090 per month (year 2), $3,182 per month (year 2), $3,278 per month (year 3) and so on.
3. If insured is able to return to work but suffers a pay drop, a partial monthly income benefit is payable to supplement the income.
3 years on, John is able to return to work but at a lower capacity and could only earn $2,000 per month. His insurance will pay him a partial benefit of $1,500 per month (benefit is computed based on the proportional drop in his income before suffering disability). In total, John’s income is now $3,500 ($2,000 + $1,500). The partial income benefit serves as an incentive for John to return to work as he would receive more income than not working.
There are other benefits included in the disability income policy, such as rehabilitation benefit (3-6 months of income benefit) and death benefit.
Why this insurance often is overlooked
Disability income policy has been around for more a decade but consumer awareness is still low. The reasons I observe are as follows:
1. Not easy for insurance advisors to explain to consumers
Indeed Disability Income policies are more complex than the standard death and critical illness policies. It is not easy to explain, in definite terms, to what extent the disability must be before the income benefit continues to be payable after 2 years (see point b). What is meant by a reasonable occupation by virtue of ‘training, education or experience?’ It is too general and subjective to accept. In assessing claims, insurance companies rely on their in-house objective judgement together with medical and other professionals’ opinions. Unfortunately, that is the nature of such insurance. Important but difficult to explain. As such, many advisors may prefer to avoid this insurance and go for those easier to market.
2. Consumers are confused
Most people associate disability income insurance with Total and Permanent Disability (TPD). It is not. TPD benefit is found in most Whole Life and Term policies and the cost of such benefit is quite cheap. However, TPD has very stringent claim criteria. It requires one to lose any 2 of 6 limbs; namely eyes, hands (above wrist) and legs (above the ankle) – or unable to perform 3 out of 6 Activities of Daily Living (feeding, dressing, toileting, washing, mobility and transferring). Disability Income insurance, however, has a more lenient form of disability definition. It is based on one’s occupation and easier to qualify than TPD.
3. Only 3 companies are offering it – GE, Aviva and AIA
GE and Aviva are the pioneers with AIA joining the list in recent years. Why are there so few providers? Firstly, the forces of demand and supply. The market size for disability income is not big enough for many insurers to be excited about. Secondly, the risk to the insurer is quite high. Consider our example John. If he is disabled for 30 years, the insurer has to pay up to $1,080,000 ($3,000 pm x 12 mth x 30 years). Yet, the premium for his Disability Income insurance policy only costs around $574 pa.
If earning an income is very important to you and your dependents, you need to insure it. Disability Income insurance is the only policy that is able to do that.