Read the three terms that decide when a disability income policy starts paying and how long it pays.
Disability income policies are hard to compare from a brochure. Each one promises a monthly sum if illness or injury stops you working, and the headline amounts are often close. What a policy pays, and when, depends on three terms in the contract: the definition of disability, the deferment period and the benefit period. Once you can read those three terms and run a sample claim through them, you can compare policies by what they would pay you.
The definition of disability decides whether a claim is paid at all. Take two people who each hold a disability income policy and each lose the use of their right hand in the same kind of accident. One is an accountant, who learns to type with one hand and returns to work within months. The other is a surgeon. She can never operate again, but she could teach, consult or work in hospital management.
Under an own-occupation definition, the policy pays if you cannot do the main duties of your own job, even if you could do other work. On that wording the surgeon would be paid. Under an any-occupation definition, the policy pays only if you cannot do any job your education, training or experience suits you for. Since she could teach, she might not be paid at all. The definition decides whether she is paid for the next 25 years or only until she is fit for other work.
Many policies sit somewhere between the two. Some use own-occupation wording for the first few years of a claim and then switch to a suited-occupation test, which looks at whether you can do a job your education, training or experience suits you for. Some pay a reduced, partial benefit if you go back to work part-time or at lower pay because of the disability. Some offer own-occupation wording only for certain jobs. Read the definition in the policy contract word for word, and read any clause about partial or proportionate benefits with it.
Own-occupation cover costs more because it pays in more situations. It matters more when your skills are specialised and when the next job you could do pays a lot less. Jun Hao, the project engineer from the module 2 example, could probably still do some desk-based engineering work after many kinds of injury. The gap between the two definitions matters less for him than for the surgeon, although it still exists.
The deferment period is how long you must be disabled before the policy starts paying. It is also called the waiting period or the elimination period. Policies usually offer a few deferment options, and the product summary lists them.
A longer deferment period lowers the premium, sometimes by a lot. Most absences from work are short, and with a longer wait the insurer no longer pays for them. A shorter deferment period costs more because the policy pays sooner and more often.
Pick the deferment period your buffer can carry. Your buffer is everything that would pay for essentials during the wait, which includes your emergency fund, paid medical leave from your employer and any group cover that pays for a while. Add these up, then choose a deferment period that ends at about the time the buffer runs out.
Jun Hao's household relies on S$3,500 a month from his pay (an example figure), as in the module 2 example. His emergency fund covers six months of that, so a six-month deferment period fits him. With a three-month deferment, payments would start in month 4 and his fund would last longer, but his premium would be higher.
The benefit period is how long the policy keeps paying once a claim starts. Options can run from a couple of years up to a set age, such as 65. A longer benefit period means a higher premium.
A disability policy is there mainly for the long case, where an injury or illness ends a career. A short benefit period covers a bad year, and your emergency fund might have handled that anyway. A benefit period that runs to the age you would stop work covers the loss of decades of income, and nothing else in your plan can replace that. If you need to bring the price down, lengthening the deferment period usually takes away less protection than shortening the benefit period.
Jun Hao's policy pays S$3,000 a month after a six-month deferment period, with a benefit period to age 65. The S$3,000 is within the policy's cap on his earnings. Say an injury keeps him off work for two years.
In months 1 to 6, his emergency fund pays for the household, which comes to 6 x S$3,500 = S$21,000. In months 7 to 24, the policy pays S$3,000 a month for 18 months, a total of S$54,000. The household needs S$3,500 x 18 = S$63,000 over those 18 months. The shortfall is 63,000 - 54,000 = S$9,000, which Mei and Jun Hao could cover by trimming spending.
If the injury is permanent, the policy pays S$3,000 a month until he is 65, for around 30 years. No lump-sum benefit he holds would come close to that amount. On a five-year benefit period, he would get nothing after year five.
You can run this check on any policy you are looking at. First, cover the deferment months from your buffer by multiplying the number of months by your monthly need. Next, multiply the remaining months by the benefit to see what the policy pays, and multiply the same months by your monthly need to see what the household spends. Subtract the payments from the need to get the shortfall, and decide how you would cover it. Finally, run the permanent case to the end of the benefit period.
Policies often reduce the benefit by any other disability income you receive, such as group disability benefits from your employer. This clause is sometimes called an offset. Policies also cap the benefit relative to your earnings. Because of the offset, two policies stacked together still cannot pay more than the cap.
Some policies offer a benefit that rises each year by a set rate. Some let you increase cover when your income goes up, without new underwriting. Both options cost more, and both help a long claim keep pace with your life. Before you buy:
Read the definition of disability in the contract word for word, plus any partial or proportionate benefit clause. Check the offset clause before you count group cover and a personal policy together. Note the extra cost of any rising-benefit or increase-without-underwriting option when you compare policies.
Write down the deferment period that fits your buffer, the benefit period that fits your working years, and the definition of disability you'd want. Before you choose, count your buffer honestly, including paid medical leave.
Write down the deferment period and benefit period that fit your buffer and working years, and which disability definition you would want.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).