How Disability Income Insurance Works

by Aktive Learning on August 6, 2012

By Seth Wee (guest contributor)

Disability Income Insurance (DII) is a very specific type of policy with the intended purpose of insuring one’s ability to work. Much like the Aesopian goose, most Singaporeans produce their own “golden eggs” in the form of monthly salaries they receive for working. DII steps in to replace the lost monthly income when a person is unable to work due to accident or illness.

Income replacement is possibly one of the top priorities for working class Singaporeans after a hospitalization plan, and many insurance policies are sold on this premise. However, as clichéd as the golden goose analogy is in the world of insurance sales, many agents are not recommending DII policies, pitching life coverage in the form of Critical Illness and Total & Permanent Disability as income replacement solutions instead. Let’s take a look at what DII does and why so many Singaporeans are under-insured in this regard.

Example of how it works

For 30-year-old Jack earning $4,000 a month, he is able to insure up to $3,000 (75%) of his gross salary with a monthly premium of $86.30 until he is 65 years old. If, due to an illness or accident, he is unable to perform the material duties of his own occupation, the insurer will start to pay out $3,000 per month 3 months after his medical diagnosis of inability to work, and the payout will continue as long as he is unable to perform his material duties of his own job.

After two years from when he is first unable to perform his own job, if he is still unable to perform the material duties of any occupation or profession to which he is suited by reason of his training, education or experience, he will continue to receive the payout. The payout also increases by 3% compounded every year.

In the worst case scenario of complete inability to work for the rest of his lifetime, Jack will stand to receive some $2.1 million over 35 years to replace the income he has lost due to the unfortunate accident or illness. A 35-year term policy of $2.1 million covering both Total & Permanent Disability (TPD) and Critical Illness (CI) will probably be too cost-prohibitive for someone earning $4,000 per month. Moreover, there are illnesses/accidents that can cause a person to be unable to work and yet not meet the definitions of TPD/CI in order to qualify for a claim. For example, one of the common claims for such coverage results from mental breakdowns.

Additionally, if Jack’s health improves and he manages to return to work after making a claim, but due to the same condition can only earn less than before, the DII policy will give him a partial payout every month (based on a formula). If he is now only able to earn $2,000 per month, DII will give him a partial payout of $1,500, making his total income $3,500 which is much closer to his original salary.

By guest contributor Seth Wee, an Independent Financial Adviser representative who blogs at Seth’s Blog on Finance. Posted via www.MoneyMatters.sg, your guide on how to make more money, save smarter, invest intelligently, and enjoy your money like a pro. Click here to get our free report on what you must know about financial freedom.

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