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An idiot’s guide to disability insurance

LIFE INSURANCE Buying on-line

What would happen if you had an accident, or a debilitating illness took away your ability to work. “How would you survive — how would you pay your bills? It is a wake-up call that inspired the concept of disability insurance.

What is disability insurance?

“Disability insurance protects your earning power.” It helps cover your loss of income by providing you with a monthly benefit if you’re unable to work for a certain period of time due to an accident or illness. In reviewing disability insurance you need to be careful to ask;

  • how a disability is defined,
  • what conditions are covered and
  • how much and how long you can expect to receive income

How is disability defined?

Disability insurance pays a monthly benefit to help cover loss of income for those under age 65 (generally) who can’t work because of an injury or illness. The definition of “can’t work” is a key factor in determining the type disability insurance and cover. A distinction is drawn between, can’t work in any occupation? or can’t work in the occupation you’re currently employed.

The terms of reference in any disability cover product will highlight the insurer’s obligation to pay. Products that define a disability that results in an inability to work in “any occupation” are generally cheaper, as the insured needs to be severely disabled to the extent that they cannot perform work tasks in any occupation. For example, a builder who suffers a back problem, may be prevented from working in the building industry as a labourer, but a back injury will not be an impediment to a regular office job.

On the other-hand, disability insurance that covers “own occupation” enables the claimant to make a claim so long as the disability prevents the insured from employment in their current occupation. For instance, a musician with “own occupation” disability cover will be entitled to claim if one of their fingers was broken accidently, and the musician was unable to earn a living for a period of time. Naturally, such disability insurance is a lot dearer, and usually only covers a % of income earned and for a limited period of time.

What conditions are covered?

  • Total and permanent disability (TPD): is one that "will remain with a person throughout" his or her lifetime, or he or she will not recover, or "that in all possibility, will continue indefinitely. If your job is knowledge and communication based, it is very difficult to be totally disabled. If you can think and talk – you can work – at least somewhat.
  • Non-total disability (NTD): covers the insured in the event that the injury sustained does not have to be permanent or total, and the beneficiary is entitled to make a claim so long as the disability resulted in a loss of income for a defined period of time.

How much and for how long?

All disability covers have a claims limit. TPD payments tend to be lump-sum one-off payments. Disability income products (NTD's) tend to pay a proportion of income earned for a period of time. Often these products will also have a stand-down period before any claim can be lodged. For example you must be off work for a period of more than 30 days, and the payments will cease after a period of time.

Other interesting facts!

Of all the products sold by insurers, disability insurance is the one most likely to end in dispute between the parties. The propensity for fraudulent claims are high. Overstating income, or overstating disability effects result in prolonged and excessive payments for the insurer. The evolution of this product has seen higher and higher rates to cover insurer's claim experience.

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