Many Singaporeans do not understand the importance of having disability income insurance. Say, touchwood, you get into an accident and are temporarily disabled. What insurances can you claim from?
Probably personal accident insurance and your health insurance, if you have one. Now notice how I mentioned temporary disability. If you think your total permanent disability (TPD) coverage from your life insurance plan is going to give you payouts, chances are, it won’t.
That’s where the disability income insurance comes in. In the scenario where you’re temporarily or partially disabled and are unable to work, this insurance provides you with income, usually in the form of monthly payouts, until you are well enough to start working again.
Before we talk more about disability income insurance, it is crucial to understand the different types of disability insurances in Singapore.
Types of Disability Insurance Policies
Total Permanent Disability
Total permanent disability insurance coverage is relatively limited. In the case of TPD, you receive TPD benefits where a payout is granted when the policyholder is found permanently disabled. The policy is terminated, after paying a lump sum amount to the policyholder, which is equivalent to the death benefit payout.
A total permanent disability insurance policy is different from disability income in terms of payouts as the payout in the latter is covered through monthly payments. In contrast, TPD benefits are paid through a lump sum amount.
Total permanent disability insurance usually comes with a life insurance plan or endowment plans rather than being a standalone insurance policy.
In this disability insurance policy, claims are also based on stringent claim criteria like permanent disability, while disability income insurance provides disability cover for both permanent, partial, and temporary disability if you’re unable to work.
To receive the TPD benefits, the following conditions have to be met:
- Loss of sight of both eyes
- Loss of sight of one eye and loss by severance or loss of use of one limb at above the ankle or wrist
- Loss by severance or loss of use of:
- Both hands at or above the wrists
- Both feet at or above the ankles
- One hand at or above the write and one foot at or above the ankle
Severe Disability Insurance
Severe disability insurance is an insurance plan that is rolled out by the Singapore government for Singaporeans and Permanent Residents. ElderShield and CareShield Life are such government schemes that can be taken by Singaporeans.
This disability insurance policy provides you with cash payouts when you are not able to do 3 out of 6 ADL (Activities of Daily Living) a.k.a Loss of Independent Existence:
- Washing (bath or shower)
- Dressing (put on clothes)
- Walking or moving around
- Transferring (move from chair to bed or vice versa)
The benefits aim to cover long-term care costs, such as hiring a helper and life support machines.
ElderShield pays out $300 or $400, depending on your enrollment period, but can be increased with supplementary coverage if there is any other insurance policy taken.
The new CareShield Life is introduced to replace the ElderShield and will give payouts starting from $600 in 2020. With the rapidly rising costs of living, alongside inflation, you have to decide if $600/month is sufficient for you to sustain your standard of living.
Singaporeans and permanent residents are automatically enrolled in this scheme when they turn 40 years old. The payout period is up to 72 months, depending on your coverage terms and your enrollment period.
Despite the differences between Careshield Life & Eldershield, they can both be enhanced with supplements from various insurers by raising your payouts by up to 5 times. Currently, 3 insurers offer such supplements – Great Eastern, NTUC Income, and Aviva.
Not only do they help increase your payouts to sustain an eventual higher cost of living, but such supplements can also help reduce the number of ADLs to 2 to be eligible for a payout.
Now that you understand the different types of disability insurance in Singapore, let’s discuss more on disability income insurance.
How does Disability Income Insurance work?
A disability income policy is created to replace a part of your monthly salary lost due to your state of inability to earn an income from your current occupation. This disability could happen due to an accident or illnesses.
As compared to TPD and severe disability insurance, disability income covers more lenient forms of disabilities.
The payouts are meant as “income protection” to help you pay your bills, rent, buy food, and other any household expense while the disability persists.
The payout received from such a policy can also be used to fund for a domestic helper or a private nurse, and even mobility equipment. Some plans even offer rehabilitation benefits, death benefits, or other lump sum payouts.
However, this policy helps by easing your financial loss, but it will not be able to cover or completely replace your income received before the accident or illness.
Key Features of a Disability Income Insurance Plan:
- It pays up to 80% of your average monthly income
- It pays a fixed amount monthly to replace your income
- Payouts start if you get disabled after the deferment period
- The monthly income payment can be given out for up to a lifetime, depending on the features of the disability income insurance policy
- The payment can be stopped or reduced when you start working again
- As your health recovers, payment benefits will be reduced accordingly
- Clarify the definition of disability in the policy, as it can differ from insurer to insurer
- The premium you pay depends on many conditions, inclusive of the definition of disability in the policy
- Some policies have a unique feature which allows the insured to stop paying for premiums if he/she fulfils 1 out of 6 ADLs
Some things to remember before applying for disability income protection:
It is like any other types of insurance, in which you have to pay a monthly or annual premium to keep your coverage in check.
There are some policies which can pay you a monthly benefit if you are unable to work at your regular job and if you can do other types of work, they will reduce your monthly benefits accordingly.
Whereas there are other policies which will not pay you benefits as long as you can earn an income despite it being lower than your regular job.
Therefore, it is crucial that you identify the disability cover and payout criteria before investing in one.
Usually, the benefit funds up to 80% of what you were earning a month before the accident or illness.
Benefit and Coverage Period
The monthly income replacement payment can be given out for up to a lifetime, depending on the features of the disability income insurance policy.
For example, suppose a young working professional, Richard, age 32, earning a monthly income of $4,000 from his job, due to a car accident is now unable to work. He will lose $1,680,000 of income he would have earned till the age of 65.
Richard’s ability to work is called human capital – his most significant asset financially.
If we let a rise in his pay income by 3% for every year, the loss of income will rise to a total of $2,600,000.
Now, what will be the scenario if he had insured himself with a disability income plan:
1. If Richard bought a disability income plan, the insurance company would have paid him an estimated monthly payout of $3,000 (75%) for the first 2 years after a waiting period (around 3 months) as he is unable to work in the condition after the accident.
2. After the period of the first 2 years, there will be two scenarios depending on his recovery, such as:
- If Richard is still unable to work in any job, he will continue to get the monthly benefit payout of $3,000 for up to the age of 65. Some policies provide a 3% increase in monthly benefit annually (which will be $3,090 per month after a year) according to the concept of the human capital and taking care of inflation.
- Now in another scenario, if Richard can work after 2 years but in an occupation where he is earning less from a lower-paying job, say $2,000 per month. So, his insurance will pay him a partial benefit payout of $1,500 per month to cover his proportional drop in his income. This benefit serves as an incentive for Richard to work again and receive more income than when he was not working, as in total he will be getting $3,500 ($2,000+$1.500).
What Does Disability Income Insurance Cover?
In simple words, disability income plans cover any injuries or illnesses that cause you to have a disability which limits you in performing your duties in your job. This helps cover your living expenses and any rehabilitation expenses you incur when you experience any form of disability.
The Social Security Administration has a study that that 25% of today’s young generation (20-year-olds) will become disabled at some point or end before their retirement. The most common reasons for the disability will be:
- Back Pain
- Heart Disease
According to the Council for Disability Awareness report, 90% of disability income insurance claims filed for long term disability benefits are for medical illnesses and not any physical injuries.
These illnesses cause disability that are counted under the disability income insurance policy. These may differ as the insurance policies vary from one insurer to another insurer.
To be clear, the policy will also count injuries such as fracture, sprains, and strains (muscle or ligament).
The causes of disabilities that can happen to you are much broader than what you realise, preventing you from earning an income. However, it is essential to note that disability income insurance is not the same as critical illness or even early critical illness insurance.
Major Things To Take Note Of For Disability Income Plans
- You need a job or be employed to apply for disability income insurance as it is an employment-based policy
- Some policies do not offer the option of allowing your monthly payouts to rise with inflation (approx 3%) consistently
- If you apply for the employer-sponsored policy, you can lose the insurance if you no longer work for the employer under the group plan
- In employer-sponsored policy, employers have the right to discontinue the offering of disability income insurance to the employees
- It is easier to get group coverage as compared to individual coverage of insurance. But, individual coverage is much “stronger” as well as it is more reliable than group coverage. So, it is recommended to buy the personal plan, even if you have a group coverage by your employer or any else
Cost of Disability Income Insurance Plans
Now, you will be wondering about the cost of disability income insurance plans. Firstly, you need to understand how the insurer calculates the risk of you becoming disabled due to any condition or how much they will pay you in payment benefits if you get disabled.
So, the factors by which the insurance company will calculate the risk are as follows:
- Age – The older you are, the more likely you will become disabled. And, the cost of insurance will also increase with age.
- Gender – This is asked because women will usually need to pay higher premiums for disability income plans. It can be up to 40% higher as they have a higher chance of claiming this insurance more than men and for more extended periods.
- Job Occupation – The insurer assesses the risk of disability. As the company classifies the jobs based on hazards of your work and level of difficulty in returning to work after recovery, there is much risk for the insurer for people with part-time jobs or multiple jobs.
- Annual Income – Disability income insurance payouts are a percentage of your yearly income. The higher you earn, the higher the monthly benefits. Thus, higher premium costs as well.
- Location – The insurance company also checks the risk of disability based on where you reside and how it can affect you by considering the regulations, claims history, and living costs of your residence. However, this does not really apply to Singapore due to the country being innately natural disaster-free.
- Health History – In this, they will ask about your current health situation to check the risk of disability in the future. The younger and healthier you are, the less risk for the insurance company to provide you with insurance. Some things that they will ask the applicant are as follows:
- Smoker or non-smoker
- Chronic conditions, if any
- Family medical history
- Current height and weight
- Blood and urine test results
Why is the Disability Income Insurance often overlooked?
Disability income insurance has been in the market for more than a decade, but even so, consumers are not aware of this insurance. Some reasons for this unawareness are:
Financial advisors are not able to explain it in the right way to consumers. Disability income insurance plans are very much complex as compared to standard life insurance policies or critical illness policies. So, it is not simple to explain disability income insurance policy for advisors, and they skip towards the policies which are easier to market and explainable to consumers.
Consumers often get confused with total and permanent disability (TPD), which it is not. TPD comes with your whole life and term policy, and it pays in a lump sum. It’s comparatively much cheaper in benefits as compared to disability income insurance.
Whereas, disability income insurance has a much lenient disability definition as compared to TPD. Disability income insurance is based on the concept of one’s occupation and more straightforward to qualify and claim than TPD benefits.
Another possible reason for it being overlooked is that there are only some companies that offer this insurance as there isn’t a large market for it. There are also much higher risks for insurers.
When the topic of insurance comes, people tend to insure themselves with standard policies such as death, critical illness, and hospitalisation.
Indeed, these factors are important life risks which people should insure themselves for. But they always tend to skip, miss out, or don’t plan to insure themselves for other critical risk factors.
In the grand scheme of things, you’ll need to understand where the disability income insurance fits in your portfolio. Health insurance covers your medical bills. Critical illness insurance covers you against long term expenses that are not covered by your health insurance.
But where disability income insurance comes in is when you are unable to perform your occupational duties due to any forms of disability. A disability could come from accidents or illnesses that are not covered under your CI plan.
After you are released from the hospital, in the scenario where you are unable to claim for your CI payout, disability income insurance provides you with funds for yourself and your dependents.
If you mainly rely on your job for income (most Singaporeans are), you should consider getting disability income insurance.
The disability income insurance is the only policy that can make things work out for you when you can’t work for yourself. If you need advice on whether you should get this insurance or which policy is the best for you, engage a financial advisor today.