Disability insurance is a complex area with a number of separate but interrelated products and options. Getting your disability insurance cover wrong can be costly and means you don’t have the right cover at the right time. In this article, we look at some of the common mistakes.
‘Able’. It’s a word we hear all the time and it’s a seemingly simple word. When it applies to you it means you are ‘able’ to do what you need to do to carry on with everyday life with little stress. You are ‘able’ to work and pay your bills. But add a ‘dis’ to the beginning of that word and suddenly your world is thrown into turmoil. You are no longer able to carry on with life as normal, but the costs of life keep rolling in. That’s the key to understanding disability insurance.
This type of insurance is often not understood and seems like a complex maze of products, options and interconnections. This can make people undervalue it. But ultimately it’s about protecting you at those times when you are no longer ‘able’ to work because of serious illness or an accident. And then it becomes hugely important – it can be the difference between financial stability or bankrupcy.
Income protection, trauma and permanent disability cover come under the umbrella of disability insurance. The first applies to when income is suddenly stopped through illness or accident and you are unable to pay your bills. The same goes for trauma, which could mean you are in hospital or sick for an extended length of time and can’t work or can only work part time. The most serious is permanent disability which is, of course, frustratingly permanent. Advisers regularly notice mistakes being made by people when it comes to disability insurance. Often the mistakes are caused by this lack of understanding of how the different types of insurance work and how they interrelate. The adviser helps by explaining and combining the types so the most effective and affordable option is found. Here are six of the most common ‘mistakes’ NZ advisers identified:
Mistake # 1. Cancelling for cost reasons
When financial constraints start to bite, we look for ways to reduce our costs. Insurance is one of the first costs people often look at cutting because the real benefit of having it is not felt immediately, i.e. it’s only when it’s gone and you really need it that you’ll feel lost without it. Clients often cancel everything leaving them with no cover in the event of a long term disability. A better approach is to look at restructuring your insurance with a view to reducing the overall cost while retaining some level of protection against unforeseen health issues.
Mistake # 2. Outdated disability products
The trouble with not reviewing your insurance regularly is that some insurance companies’ products can become ‘outdated’. This means that the company has made changes to their current products to ensure they remain competitive, but do not update their older policies. It’s often not possible for them to update older policies under contract, and there are many reasons for this. Ultimately, this means that you can end up with outdated insurance benefits. It’s the job of insurance specialists and advisers to keep up to date with changes so they can assess the value of product updates and how they compare to older products, so it’s best to get regular reviews of your policies.
Mistake # 3. Price-driven decisions
This was also a common point made by NZ’s insurance advisers. They noticed that while budgetary constraints play a role in the insurance purchasing decision, many clients were happy to insure their car or their boat or home, but had not seriously considered the financial implications of a long-term illness. Being unable to work for an extended period could be even more disastrous than having your home destroyed and yet, for many people, the need to insure their home is prioritised higher than their income-earning ability.
Mistake # 4. Wrong mix
Over half of the respondents replying to our survey mentioned this issue. They gave many examples highlighting where a mix of disability products wasn’t optimal in the context of their clients’ situation. Here are a couple of examples;
Clients with a mortgage who cover their disability income needs purely through an income protection policy. Under this scenario, a claim entitlement would be offset by any ACC entitlements the policy owner would receive. A combination of mortgage repayment insurance and disability income protection is often a better alternative for clients with a mortgage who suffer an injury and are covered under ACC.
Using total and permanent disablement (TPD) as a proxy for long-term disability income protection. The threshold for TPD is relatively high. You have to prove that you will never be able to work again. However, many long-term conditions have a reasonable likelihood of recovery and ability to go back to work after a number of years. This could, for example, be between five and 10 years. If your income protection policy is for two years only, you potentially risk having no income for a number of years following the end of your income protection.
Mistake # 5. Not understanding cover
Advisers say that clients often understand very little about the policies they have in place or how the various products work together. Disability insurance is a complex area with many different products and variations. Should you buy accelerated or stand alone? If accelerated, should I add a buy back option? What is the best income protection wait period for my situation? Indemnity or agreed value – what’s the difference? How does ACC impact your entitlement? Properly put together policies optimise the benefits for a given budget. Specialist skills and knowledge are required to ‘design’ the insurance portfolio so it best suits the specific needs of a client.
Mistake # 6. Not reviewing cover
Reviewing all insurance cover on a regular basis is particularly important for disability cover. It should be reviewed every two years, or even more often, to ensure your insurance continues to meet your needs as your situation changes. It’s also useful from the perspective of identifying an entitlement. For example, one adviser says that a client who broke his leg was entitled to a specific benefit claim under his income protection policy. It wasn’t until an adviser identified this during a review sometime after the event that this came to light. The result was that the client received $12,000. In our discussions with advisers, we hear many similar examples where advisers have been able to identify a claim entitlement which the client had no idea they could claim.
Disability insurance is a complex area with a number of different products and variations. This is also an area of insurance which is continually innovating and changing. Medical advances have increased survivability rates and what were traditionally terminal (fatal) conditions are no longer deadly. The result is that insurance companies update their products to remain competitive. Understanding how best to put together disability insurance cover to suit your needs requires specialist skills and knowledge. And making sure your cover remains appropriate for your needs means that you need to review it on a regular basis. If you are unsure about your disability insurance or are looking at options, we would encourage you to seek advice from a professional insurance adviser who can help you navigate your way through the disability insurance maze. It’s the best way to ensure you are covering all your needs if you should ever need to claim, and an adviser can help to make it more affordable too.
Specialist skills and knowledge are needed to understand how best to put together your disability insurance needs.
IMPORTANT PLEASE READ: This article is for information purposes only. Its content is intended to be of a general nature, does not take into account your financial situation or goals, and is not a personalised financial adviser service under the Financial Advisers Act 2008. It is recommended you seek advice from a financial adviser which takes into account your individual circumstances before you acquire a financial product. If you wish to consult a Financial Adviser, please use our “find an adviser” database.