You will be able to read the three terms that decide when and how long a disability income policy pays.
A surgeon and an accountant each lose the use of their right hand in an accident. The accountant learns to type with one hand and goes back to work within months. The surgeon can never operate again, though she could teach, consult or work in hospital management. Both hold disability income policies. Whether the surgeon's policy pays her for the next 25 years, or stops once she is fit for some other job, depends on one definition in her contract.
Disability income policies look alike in a brochure. Three terms decide what they actually do: the definition of disability, the deferment period and the benefit period. This lesson goes through each.
An own-occupation definition pays if you can't do the main duties of your own job. The surgeon who can't operate would be paid, even if she could do other work.
An any-occupation definition pays only if you can't do any job your education, training or experience suits you for. Under that wording, the surgeon who could teach might not be paid at all.
Between the two sit many variations. Some policies use own occupation for the first few years of a claim and then switch to a suited-occupation test. Some pay a reduced, partial benefit if you return to work part-time or at lower pay because of the disability. Some only offer own-occupation wording for certain jobs. Read the definition in the policy contract word for word, along with any clause about partial or proportionate benefits.
Own-occupation cover costs more, because it pays in more situations. How much it's worth depends on your job. The more specialised your skills, and the bigger the pay drop to the next job you could do, the more it matters. For Jun Hao, a project engineer who could probably do some desk-based engineering work after many injuries, the gap between the two definitions is real but smaller than for the surgeon.
The deferment period is how long you must be unable to work before benefits start. It's also called the waiting period or elimination period. Policies commonly let you choose from a few options, and the choices available are in the product summary.
A longer deferment period lowers the premium, sometimes a lot, because most absences are short and the insurer stops paying for them. A shorter one costs more because the policy pays sooner and more often.
The right deferment period is the one your buffer can carry. Add up what would cover your essentials while you wait: your emergency fund, paid medical leave from your employer and any group cover that pays for a while. Choose a deferment period that ends about when those run out.
Jun Hao's emergency fund covers six months of the S$3,500 a month his household relies on from his pay, in the module 2 example. A six-month deferment period would line up with it.
The benefit period is how long payments can last on any one claim. Options can run from a couple of years to a set age, such as 65. The longer the benefit period, the higher the premium.
The risk that a disability policy really protects against is the long one: the injury or illness that ends your career. A short benefit period protects you against a bad year, and your emergency fund might have handled that. A benefit period to the age you'd stop work protects you against losing decades of income, which nothing else in your plan can replace. If you have to trade something off for price, a longer deferment period usually costs you less protection than a shorter benefit period does.
Here is Jun Hao's case with policy terms invented for the lesson. Benefit S$3,000 a month, within the policy's cap on his earnings. Deferment period six months. Benefit period to age 65. Suppose an injury keeps him off work for two years.
For the first six months he relies on the emergency fund, which covers 6 times S$3,500, or S$21,000. From month 7 to month 24, the policy pays S$3,000 a month for 18 months, which is S$54,000. His household needs S$3,500 a month over those 18 months, or S$63,000. The shortfall is 63,000 minus 54,000, which is S$9,000, about what Mei and he could cover by trimming spending.
Now suppose the injury is permanent. The policy keeps paying S$3,000 a month until he is 65, for around 30 years. No lump-sum benefit he holds would come close.
With a three-month deferment instead, payments would start in month 4, and the fund would last longer, but the premium would be higher. With a five-year benefit period instead of to-65, the permanent case would leave him with nothing after five years.
Policies often reduce your benefit by other disability income you receive, such as group disability benefits from your employer. That clause, sometimes called an offset, means you can't stack two policies to get more than the cap. Check it before you count group cover and a personal policy together.
Some policies let you choose a benefit that rises each year by a set rate, or let you increase cover when your income rises without new underwriting. Both cost more, and both help a long claim keep pace with your life.
The activity asks you to write the deferment period that fits your buffer, the benefit period that fits your working years, and the definition you'd want. Count your buffer honestly, including paid medical leave, before you choose.
Write the deferment and benefit periods that would fit your buffer and working years, and the definition you would want.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).