How effective is disability insurance?

Smart practice

Wednesday 26 August 2015

Redesigning TPD cover to meet client needs

Life risk insurance is designed to provide financial relief when a medical condition prevents a person's ability to earn an income or creates significant debt, or both. It's not designed as an investment vehicle that delivers a windfall at claim time. Equally, an insured person should not experience a shortfall if they believe they have secured the right cover.

Life risk insurance should ultimately help restore the person to the same financial position they enjoyed before the onset of the medical condition.

One form of life risk insurance, total and permanent disablement (TPD) cover, was created many decades ago to provide a lump sum payment to someone unable to ever work again due to a totally disabling injury or illness. If the person is never able to work again and is unable to earn an income, TPD could be used to eliminate personal debt and/or provide a regular income through the investment of the lump sum.

Making an informed decision

Two key considerations in paying a TPD claim are the severity of the medical trigger and the occupation of the claimant.

When the client first takes out their TPD policy, it's vital that the adviser clearly outlines the difference between cover for an inability to work in their 'own' occupation (a more expensive option) and cover for an inability to work in 'any' occupation. The adviser's role is to help the client to make an informed decision whether paying a higher premium for 'own occupation' cover is justified.

The challenges facing a fair assessment

Over the years, the TPD benefit has been refined to cover the loss of income for specific occupations, but a challenge remains in determining whether someone in a particular job should receive a full TPD payout if they can no longer perform in their specific role, but may be capable of continuing to work in a different job within the same industry.

For example, a surgeon who injures their hand and can no longer undertake surgery could become a valuable member of a university teaching faculty, albeit with a lower earning capacity. This is where the aim of the insurance comes into play.

TPD cover should restore the surgeon to the same financial position they enjoyed before the onset of the medical condition, even if they are still able to work. In this situation, the gap between original and the new, lower income should be covered rather than the complete loss of original earnings.

The development of the occupational aspect of the TPD benefit has taken insurance providers down a benefit-design route that has left many clients without the cover the TPD benefit was initially designed to provide. Evolving medical treatments, survival times and subtleties in new occupations have been largely ignored in the product development process and the assessment stage.

Determining eligibility and the occupation definition

TPD claim assessment has become increasingly subjective, with a three-tiered approach now used to determine eligibility for payment, involving:

  1. the severity of a claimant's medical condition
  2. the claimant's occupation
  3. the legal and/or product definition of the claimant's occupation.

With the 'any occupation' definition, a claimant may have a severe medical condition that leaves them unable to work, but if there are certain aspects of their occupation they could potentially perform, payment may not be made as per the claimant's specific policy definition. This is despite the fact the claimant may have experienced severe financial difficulties for a prolonged time due to the medical condition.

On the other hand, a person with a less-severe medical condition may get a windfall payment under an 'own occupation' definition, even though they may still be able to derive a similar income from another occupation.

The risks of progressive disablement

An ongoing disconnect exists between what medical professionals and insurance providers tell their clients. A doctor will treat a patient to a point where they advise that working is no longer an option, while the insurance company may still feel there are elements of the client's 'own' or 'any' occupation they can still perform. Although the insurance provider is technically and legally correct under the terms of the contract, the client's needs are not being met.

Current TPD definitions are geared to only enable payment once a claimant has reached the state of total disablement. However, most medical conditions that qualify for TPD payment progress and deteriorate over a number of years. During this time, the client reduces work hours and income, with no benefit payment provided leaving no option to slowly pay off debt as the condition becomes more severe.

Certain conditions, such as multiple sclerosis, may reach a state of partial disablement and can remain in that state for many years. The client then has an income reduction without the ability to claim from the lump sum disability benefit.

In Australia, insurance providers have been less progressive when it comes to reviewing TPD definitions.

As medical science, occupations and financial needs continue to change, the insurance industry (including product providers and advisers) must also change to ensure clients' needs are put first.

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