You will be able to explain how disability income insurance differs from a lump-sum disability benefit.
Nadia, Jun Hao's colleague, slipped a disc playing futsal last year and couldn't sit at a desk for four months. Her employer paid her during medical leave for a while, then the paid leave ran out. She had term life cover, a shield plan and a small critical illness policy, and none of them paid her a cent, because she hadn't died, the hospital bills were small and a slipped disc isn't a critical illness. She got through on her savings and her parents' help.
Her situation is far more common than the ones most people insure against first. This lesson explains the cover that would have paid her, and how it differs from the lump-sum disability benefits many people already hold.
For most people in their twenties and thirties, the biggest financial asset they have is their ability to earn for the next 30 or more years. At S$5,000 a month in take-home pay, as an example, 30 years of work is S$1.8 million before any pay rises. That asset doesn't show up on a net worth statement, and it can stop overnight.
Death during working years ends it permanently, and module 2 deals with that. But for most people of working age, an illness or injury that keeps them off work for months is more likely than dying before retirement. Life cover and critical illness cover do nothing for most of those cases. Few people insure against them, and that's the gap lesson 4.3 of The Singapore personal finance system, end to end, Critical illness and disability income cover, pointed to.
Disability income insurance pays a monthly benefit while illness or injury stops you from working, after a waiting period. It replaces part of your income rather than the whole of it. Insurers cap the benefit at a share of your earnings, so that you're better off returning to work when you can. The cap and how they measure earnings are in the policy.
It pays for any cause the policy covers: a back injury, a broken leg, depression, a long recovery from surgery, a cancer, a stroke. The question it asks is whether you can work, not what you were diagnosed with. It keeps paying each month you can't work, until you recover or the benefit period ends.
The terms that decide whether and how long it pays are the subject of lesson 6.2, Own occupation, deferment and benefit period.
Many life policies, and the Dependants' Protection Scheme, include a total and permanent disability benefit, often called TPD. It pays a lump sum, usually the death benefit or part of it, if you become totally and permanently disabled as the policy defines it.
The definition is strict. Typically you must be unable to work in any occupation, often for a continuous period first, and the disability must be judged permanent. Some definitions also pay for specific losses, such as the loss of sight in both eyes or the use of two limbs, and each policy sets out its own list.
A TPD lump sum is valuable for the most severe cases. But it does nothing for a disability that is long but not permanent, or one that stops you doing your job but not every job. Nadia's four months would never have qualified, and neither would two years off after a car accident followed by a return to work.
The two forms answer different risks, and holding one doesn't mean you have the other.
A lump sum suits a one-off, permanent change: it can clear a debt, pay to adapt a home or replace income you will never earn again. It pays once, and only for the severe cases its definition covers.
A monthly benefit suits an unknown length of time off work. It pays for as long as you can't work, within the benefit period, whatever the cause. A short absence costs the insurer little and a long one costs it a lot, and the premium is priced on that.
Critical illness cover from module 5 sits between them: a lump sum, but triggered by a diagnosis rather than by inability to work.
Here's Jun Hao's version, with figures made up for the example. His household relies on S$3,500 a month from his pay, S$42,000 a year. Their emergency fund holds S$21,000, which is six months of that. If his income stopped for twelve months, the fund would cover half the year and leave S$21,000 of bills with nothing to pay them, before any extra costs from being unwell.
His cover for that year: none. His group cover at work includes life and hospital cover, but no disability income. His whole life policy's TPD benefit would pay only if the disability were total and permanent. His critical illness rider would pay only for a listed diagnosis. For an ordinary long injury, he would have the emergency fund and then nothing.
Nadia, single and renting, is even more exposed. With no partner's income to fall back on, her pay is the household's only income.
The activity asks you to write down what would happen to your household budget if your income stopped for twelve months, and what cover you have for it. Count the months your emergency fund covers, add any paid medical leave your employer gives, and then write what pays after that. For many people the honest answer is nothing.
Write what would happen to your household budget if your income stopped for twelve months and what cover you have for it.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).