Does Your Client Have The Right Mix Of Permanent Disability Cover?

To protect individuals against the risk of permanent disability, the industry has tended to favour lump sum disability benefits. This raises a number of concerns – the first being that if an individual is temporarily disabled (which happens much more often than you’d think!), they will not receive a pay-out. Only once they are assessed as permanently disabled, will they be paid out a once-off lump sum.

Beware the Lotto winner effect

Secondly, research shows that individuals tend to intuitively over-value these once-off lump sum pay-outs, making the decision to use this kind of benefit to secure future income a risky one. Many individuals find themselves falling victim to the ‘Lotto winner effect’, believing they have more money than they do and neglecting to invest it wisely.

If they do choose to invest, at planning stage, there is the difficulty of calculating in the present the correct lump sum amount required for the future. This could result in over- or under-insurance, especially as there is no knowing when a disability event will occur or what changes in lifestyle or inflation lie ahead.

At claim stage, the individual faces the risk of taking that lump sum pay-out and turning it into an income stream. If the investment does not grow as planned, if inflation rates are higher than expected, or if the individual lives longer than expected, the chosen lump sum might run out before retirement age or may not be sufficient to fit the individual’s requirements for the future.

The truth is that a once-off lump sum benefit is not suited to replacing a future income stream. Monthly income replacement benefits, in contrast, are a much better fit for this kind of cover. FMI’s Extended Income Protector, for example, offers monthly payments and has been designed to ensure continuity of income over time, in line with inflation. This means that the inflation, investment, and longevity risks for this kind of cover are held by the Insurer, not the Insured. The Extended Income Protector also pays out for long temporary disabilities (over 24 months), which can be a lifesaver during the permanent disability waiting period.

What is the winning formula?

Just because a lump sum disability benefit is not suited to insuring future income does not mean that the individual should have only monthly income replacement benefits. When it comes to permanent disability cover, we believe a combination of monthly benefits and a once-off lump sum is required to ensure complete permanent disability cover. The lump sum payment should be used for once-off events such as repaying large debts, business assurance, or making necessary lifestyle changes while monthly benefits should be used to replace a future income stream on a month to month basis.

It is important for your clients to understand that these are different products with different functions and they should be used in conjunction rather than as replacements for each other to ensure comprehensive permanent disability cover.

Paying claims is our business!

Whether permanent, long-term, or temporary, we understand the importance of a claim being paid. That’s why we offer comprehensive claims criteria on BPE. Withguaranteedminimumpaymentfor specificconditions,alossofincomeunderpin,andafunctionalimpairmentunderpin, our comprehensive claims criteria allow your client to choose under which criteria to submit their claim, ensuring they receive the highest possible pay-out. Click here to learn more about these criteria.

Already have cover?

Upgrade your existing client’s BPE policy to include our comprehensive claims criteria by contacting the Financial Adviser Distribution Team on 0860 10 52 08 or [email protected]