Being a highly technical area of financial planning, taking stock of one’s disability cover will likely involve more than a cursory glance at your policy document. Modern iterations of disability cover, new entrants into the insurance arena, highly technical terms, and ever-evolving definitions of what constitutes a disability can make navigating this field of planning particularly arduous. With disability being top of mind this month, our advice is to take the opportunity to review where you stand in this regard.
Assess your risks
One’s circumstances change over time – often much quicker than we tend to realise – so give thought to the unique set of risks you currently face should you suffer from a temporary or permanent disability. Do you have debt? To what extent have your debt levels changed since you implemented your disability cover? What is your current net worth? To what extent would you be able to settle your debt if you were permanently disabled today?
Lump-sum disability cover is an effective way of ensuring that you can pay off capital amounts of debt in the event of a permanent disability, so it’s important to quantify the financial risk you would face. You also need to factor into account how, and to what extent, you would need to replace your income should you become permanently or temporarily disabled – keeping in mind that several factors would influence this need. For instance, you would need to take into account whether you are the sole breadwinner, whether or not you have other sources of income, the levels of debt you would need to service, and your general costs of living.
Also important to consider are personal risks that contribute toward the chance of becoming temporarily or permanently disabled, such as whether you regularly engage in high-risk activities (such as scuba diving, motor cross, sky diving, and so on), whether you travel extensively as a result of your occupation, the nature of your occupation, and whether you are required to travel into high-risk areas.
Determine what cover you currently have in place
The next step is to determine what disability cover you currently have in place, both in your personal capacity and through your group life cover. When undertaking this exercise, pay careful attention to the fine print, definitions and type of cover that is being provided. For instance, if your cover is ‘accidental’, keep in mind that this type of cover is only payable if you meet with an accident that renders you permanently disabled within a specified period of time from the date of the accident, and not from any other cause. This means that if your disability arises from an illness such as stroke or cancer, you will not qualify for cover.
Also pay attention to the waiting periods you have in place on your income protection benefit because, if you become temporarily disabled, you will only be able to claim after the expiration of the waiting period stipulated in your policy document. The shorter your waiting period, the higher your premiums are likely to be – which is why many opt for a three-month waiting period, being a manageable period to self-fund providing that you have sufficient emergency cash in place.
While insurers tend to have similar general exclusions listed in their policies, it is the specific underwriting conditions that you should pay careful attention to. When applying for cover, you would have gone through a medical underwriting process following which certain restrictions and/or exclusions may have been applied to your policy.
It is also important to establish whether your cover ceases at a pre-determined date such as in the case of income protection cover which generally ceases at age 60 or 65. On the other hand, some cover – such as life or dread disease cover – may be whole-of-life in which case the cover will only terminate on your death.
Consider your disclosure and/or changed circumstances
Depending on when you put your cover in place, you may want to ensure that you made full disclosure during the medical underwriting stage and that you have since kept your insurer up-to-date with regard to any changes in your circumstances that would affect your policy, such as whether you have subsequently taken up smoking, if you partake in recreational drugs, or a change in occupation that includes a hazardous activity. Any changes to your income levels may affect the level of income protection cover you require, so be sure to take this into account.
Full disclosure at the underwriting stage is key to ensuring that your claim is valid, bearing in mind that any material non-disclosure may result in your claim being rejected. Medical underwriting may be an overwhelming process due to the number of medical questions asked and the detail of medical information required, but our advice is to err on the side of caution and rather disclose more information.
Your retirement funding position
A key consideration when reviewing your financial needs in the event of a permanent disability is retirement funding. Your retirement is dependent on your ability to generate a regular income and to use a portion of it to fund your retirement years. A useful way to mitigate this risk is by putting lump-sum capital disability cover in place which, in the event of permanent disability, would be earmarked for your future retirement expenses.
In order to do this, you would need to contemplate your post-retirement living expenses – making assumptions regarding inflation and longevity, amongst other things – and then capitalise the amount you would need to meet these objectives, once again making assumptions regarding investment growth and returns.
Keep in mind that capital disability cover is generally cheaper than income protection, making this a more cost-effective way of securing retirement funding should you become permanently disabled.
The associated costs of living with a disability
While you are healthy, it is difficult to contemplate the additional expenses that a permanent disability would give rise to and, to a large extent, it would depend on the nature of one’s illness or disability. For instance, permanent mental disability following a stroke may give rise to costs such as speech and occupational therapy, home nursing, and physical therapies, whereas the onset of a physical disability may give rise to costs such as home and vehicle modifications, medical appliances, prosthetics, and wheelchairs.
It’s also important to consider the emotional, physical and logistical impact that a permanent disability would have on your loved ones and/or those who would need to care for you. As such, lump-sum disability cover can be used effectively to help cover the costs associated with caring for a permanently disabled person, many of which are not covered by medical aid, so be sure to take this into account when reviewing the level of cover you need.
Disability cover is not forever
While you may view the costs of disability cover as a grudge purchase, bear in mind that as your net worth increases over time, your need for insurance cover is likely to reduce, which is why reviewing your disability cover regularly is so important. For instance, as your home loan and other debts reduce and your net worth increases, it is likely that your need for capital disability cover will decrease and ultimately fall away.
Having said that, our advice is to not cancel any long-term insurance cover that you have in place until you’ve had a full risk analysis prepared. The older you get, the more difficult and expensive it is to secure life and disability insurance, so rather seek advice from an independent financial advisor before reducing or cancelling any cover.
We all like to believe that it’ll never happen to us, until it does. The appropriate amount of disability cover through a reputable insurer can provide you with peace of mind that you will be financially protected should illness or accident leave you disabled.