Disability Class of Insurances

Last week we looked at the differences between CI and ECI. Here, we explore some classes of insurances that tend to be less discussed, or easily confused. Such classes of insurances tend to exhibit significant variance across insurers as to how the coverage is provided. This article serves to show the general aim of the types of insurance that cover disability.

Total and Permanent Disability

The first and most common disability class of insurance is total and permanent disability. Often sold as a rider to whole life, term plans, endowment, or sometimes embedded in the plan itself, this Insurance provides protection against income loss and increased costs due to a complete and permanent disability.

What are the technical details?

The words total and permanent should jump straight out. A look at the definitions (extracted from one of the insurers) *:

As you can see, the words and idea of total and permanent effect is repeated, and that is precisely what this insurance is designed to cover. Also note that there are some age bound definitions. 

What does it mean?

This class of insurance is designed for total and permanent disability. An example of a claim would be (based on the above definition found in this policy) someone who is certified by a doctor to have totally and irrevocably lost sight in both his eyes would receive a payout. While newer TPD type policies tend to do a lump sum payout, older TPD policies may do a staggered payout over several years, and are subject to continued disability. 

Is it important?

This is an extreme and catastrophic event. In such situations, the impact will be huge, financially and physically. Financially, there will be an increased cost of living (since you will need help for daily living) as well as face a fall in income (since it will be difficult to continue working).The money from the payout will be able to support the family, at least during the transition. 

Disability Income

The second class is known as Disability Income (DI) insurance. This class of insurance is designed to protect your income in event of disability. Often a standalone policy, it can occasionally be found as a rider to a whole life or term plan.

What are the technical details?

Looking at a policy, the definition above*, would be something like: 

“provides a monthly income in the event of disability due to illness or accident. The income will be payable in the event of Total Disability (as defined below) of the Life Assured exceeding the Deferred Period.”

And reading on, we learn what Disability means: 

Disability in DI is focused on the ability to work. DI is not medical condition specific but it is based on the ability to perform the material duties of work regardless whether the cause is medical or injury. 

There is another important point: The deferred period. That is found in the same document as follows: 

A deferred period is a period of time, varying from policy to policy, during which if the individual happens to be continuously totally disabled, the period immediately beyond the deferred period qualifies for the total disability. 

DI has another gem of a protection. This benefit is sometimes called a partial disability** benefit. After a period of disability, if you are able to go back to work but in a reduced capacity, and your income faces a fall (of a certain amount depending on insurer) as a result of the disability, you will get to enjoy this benefit. This ensures that even if you went back to work on a lower income, as a result of the injury or illness, the insurance will ensure you will not suffer too much of a loss. The variability of such a term across the insurers can be quite broad, so always check the policy wording. Some may use a weighted formula while others use a simple mathematical equation to calculate the value. 

What does it mean?

This class of insurance is designed to protect against a loss of income. Specifically, a catastrophic loss of income over a medium to extended period of time. In essence, if someone is unable to perform the material duties of their job for a period of time (deferred period) and continues to be unable to perform, the payout begins. It also ensures that if the disability is not permanent, but has a long term impact on earning power, the impact is mitigated.

What would that sort of situation look like? The easiest would be long term medical leave for example, which could impinge on your ability to work. Mental conditions leading to inability to hold down work might be another situation. Do note that in DI, as with most health and life insurances, the doctors play a big part. They need to certify that you are unable to work. 

In any case, these insurance provides a payout on a regular basis instead of a lump sum. This is because there is a need to prove continual disability to ensure payout eligibility. 

Is it important?

Disability Income is designed to protect your income against catastrophic loss of incomes due to illness or injury, and the insurer takes over in paying you the income. It is critical as there are many illnesses that can cause you to lose your ability to work but they not be covered under other insurances such as CI. Mental illness would be a one example. 

The variability of such insurance is very wide, with varying deferment periods, differences in definitions of the total disability, criteria of deferment period. The policy contract has to be understood as a whole, as this class of policy can be complicated. 

Long Term Care

The third class of such insurances is typically referred to as long term care insurance. It is designed to protect against the cost of taking care of you in event of disability. Again, it is often a standalone plan though it has appeared as a rider in some guise.

What are the technical details?

Disability here could be defined1,2 along the line of “Severe disability” is the inability of an individual to perform three or more Activities of Daily Living (ADLs) independently, with or without mobility aids (e.g. walking aids, wheelchair). This is the eldershield definition. Eldershield is the most common form of long term care insurance. In such situations, the individual will require the physical assistance of another person as they are unable to perform the ADL.

What is ADL? There are 6 ADLS that are commonly used. The easiest way to remember is the things you do in the morning:

You get out of bed (Transfering), walk to the toilet (Mobility). You use the toilet (Toileting), shower (Washing) and change your clothes (Dressing). Finally. head to the kitchen to eat (Feeding). If you are unable to do a number of these activities, the payout will begin. As we can see, eldershield uses the inability to perform 3 ADL as a claim conditions, but some insurers do offer plans with payouts upon just 1 out of 6 ADL allowing you to enhance your protection.  

What does it mean?

This class of insurance is designed to help you mitigate the increased cost of living should you need to hire someone to assist you in day to day life. Again this is not medical condition specific but physical condition; the situation where you are no longer independent***. Hence it is broad. Claims for these are straightforward, as long as the doctor certifies the inability to perform the ADL and the insurer agrees, the payouts will continue. Payouts are also ongoing instead of lump sum; hence continual evidence of disability must continue.

Is it important?

In the event you are unable to perform ADL, this will mean you will need someone to take care of you. The costs to hire someone can really be exorbitant. Our healthcare system is excellent at keeping you alive, though at a high financial cost. As they say, a doctor kills your ills, and kills you with bills. Hence, long term care insurance helps mitigate costs. And while it is true that Singapore provides significant subsidies, they are means tested and the level of luxury (single room services for example) are definitely beyond the scope. So having such a plan ensures that you can have some level of comfort during the course of dealing with the disability. 

Personal Accident

The last class we will explore today are Personal accident plans which cover disability, or sometimes called Disablement. In this type of policies, the coverage for disablement can vary (even within a policy, let alone across companies) so really, this is one area that you need to read the policy document (NOT the brochure. If in doubt, check with a financial advisor). Most people will buy this general insurer as a standalone but some life plans may have a rider that acts similar to this. 

What are the technical details?

These plans cover disability, or disablement, due to loss of specific limbs or use of some human function. Such plans might also add a weekly income benefit for temporary disablement leading a fall in income. Definitions might follow the following table:

The key to note though, these policies are personal accident plans. The cause of such conditions must always be an accident, and not illnesses. Occasionally, the policies may include some infectious disease cover but take note that the infectious disease cover may not apply to all the clauses. 

One other thing to note that this plan also provides cover for accidents leading to emergency outpatient visits. In case you didn’t know, most hospitalisation plans do not cover emergency outpatient (those late night trips to A&E that do not lead you to being warded? Can’t claim. But under a personal accident plan, accidents may be covered). 

What does it mean?

This class of insurance is designed to mitigate losses and costs caused by accidents. That makes it somewhat limited if you are a careful person, though accidents can still happen. The payouts and the benefits can be sizeable and are certainly welcomed when serious accidents occur. This class of insurance is simple to buy as they might not have much underwriting (though there could still be some). 

Is it important?

Personal accident plan’s greatest strength is it allows for a high coverage (e.g. for permanent disablement of $500,000), could cost you about $786 (at time of writing for one company’s plan; may not be applicable across the board) a year. It is reasonably cost effective, considering the potential benefits. Secondly, most personal accident plans don’t have medical underwriting, so you can purchase them if you are in bad health (but some clauses will impose certain conditions). 

So, what now?

All insurance has a benefit; it allows you to mitigate future costs and losses by paying a premium now. You are in essence investing to protect yourselves. In our next article, we will consider the contrasting differences across the various class of disability insurances. From this article, we can see that there are clear overlaps and yet, each product provides a unique protection. Hence, a comprehensive protection plan should endeavor to plug gaps while minimising overlaps. The complication arises due to the complexities of definitions and policies, so please, speak to an advisor.

References:

*Do note that all the definitions contained in the entire article are extracted from different insurers, and may differ from insurer to insurer, and from policy to policy. Refer to the policy wording for detailed descriptions. For more information, consult an advisor.

*This is a snippet of the definition. Do note that there may exist other definitions contained in each policy, and every point in the policy contract needs to be read in the context of the contract. Refer to the policy contract for detailed descriptions. For more information, consult an advisor. 

** Nomenclature may differ, so always check the product summary.

*** Astute readers would notice immediately that a CI plan actually provides for Loss of Independent Existence. But that is a lump sum coverage. If you needed to stay in a home, for example, moneysmart (https://blog.moneysmart.sg/family/nursing-homes-singapore/) estimates the costs at about $1,200 a month on the lower end. While its true that subsidies apply, they are typically means tested. In five years for example, a $1,200 a month will cost $72,000 in total. And these are not claimable under hospitalisation (Nursing home is different from hospitalisation, though you might claim under community care hospital but again, definitions matter).

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