Differences in Disability Insurances

So while we looked at the classes of disabilities previously, we are sure there are some disagreements as to their importance, and the overlaps that exists. So it is something we intend to explore in greater detail today. Feel free to do a recap on last week’s article here

The four main classes are:

1. Total and Permanent Disability (TPD)

2. Disability Income (DI)

3. Long Term Care (LTC)

4. Personal Accident. (PA)

Some thoughts

A few important points to note that the definitions of Disability varies widely across the four classes; in fact even within a class, the definitions across insurers may have some variance. Another point to note is the payout structure, which can be lump sum or a regular payout. If its regular, most insurers will expect evidence of continued disability.

It is undeniable that there are overlaps. If for example, you are unable to perform your ADL, it is likely that there will be a period of time that you are unable to work, therefore the DI will kick in as well as LTC. And if it is caused by an accident, the PA plan might pay out as well. Finally, if its total and permanent, the TPD might payout as well1.

A cursory inspection might therefore conclude that buying any one of the above mentioned policy is sufficient. That can't be further from the truth. Each insurance policy has a domain that it alone protects. A medium term loss in income, but one where it is possible to return to work soon, will not be covered by TPD or LTC as it is not total and permanent, and neither do you need assistance in daily living (for example: long term MC due to health). In contrast, an elderly person who is not working but needs someone to take care of him or her cannot claim DI or TPD unless it were permanent (for example: recovering from a fall).

Furthermore, when the multiple insurances payout, it also means the situation is serious: a loss of work, coupled with a need for someone to help you with daily living means a fall in income (covered by DI) and a rise in costs (covered by LTC). If it were permanent, you may need significant lifestyle changes and a lump sum TPD payout will help a lot2.

Should you prioritise

A good question. As we've seen, the policies does have a degree of overlap. That in and of itself is not an issue; as seen above, typically when the overlap, the situation that results in overlapping claims being accepted are severe and require more support. What we want to do is create a holistic insurance plan that is built specifically for the individual's needs and protects against the various risks, while taking into account existing protection and budgets. This can take considerable effort. Coupled with the fact that the policy coverage varies across insurers, it is important to design a proper plan taking into consideration all the limitations.

Claiming

A word about claim conditions. While some might point out the claim conditions are many (they are), it is not an onerous as it sounds and it is designed to prevent abuse. Take for example some exclusions that are commonly found3:

Active participation in terrorism, strike, riot or demonstration.

Active participation in any criminal act

Deliberate misuse of drugs or alcohol

Failure to seek or to follow proper medical advice which has significantly and adversely affected the insured.

Self destruction or any attempt at self destruction whether sane or insane

In most cases, these exclusions are designed to ensure that we avoid reckless behavior, to mitigate moral and morale hazards. This helps to ensure that the insurance does what it supposed to do, to protect against known and acceptable risks.

Even meeting the claim conditions, insurance is designed to protect against severe and uncommon situations. Such situations can be catastrophic to an individual, and the effects can be mitigated with a proper financial plan.

Final Thoughts

Insurance planning should not be done in silo (e.g death only, CI only). It has to be taken as a whole deal. If you went out in the rain with an umbrella that has a huge gaping hole in it, it probably wouldn't do as well. Hence, it is best to plan your insurance holistically.

In fact, insurance planning shouldn't be done outside a holistic financial planning approach. You need to consider your budget, expenses, and future and present needs (See this article where we explore a holistic financial planning approach). Insurance is one wheel of our financial planning journey.

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Footnotes.

1 All claims are subject to all of the insurer's claim conditions. The policy contract will explain the various terms and conditions that apply. For example, many policies exclude deliberate misuse of alcohol. So claim conditions apply.

2 We have left personal accident plans out of the discussion because it cover accidents only, and the scope of coverage varies greatly across insurer.

3 Not an exhaustive list.

#insuranceplanning #claims