by Steve Wright
In this second part on the topic, I’ll explore a couple of issues to consider when giving advice on temporary disability risk and insurance (income protection, mortgage repayment covers and waiver of premium) that pays monthly benefits. There may be others.
Protecting retirement with monthly disability covers
Income protection policies can take care of disabled clients reasonably well during their working lives – up until they reach age 65 or age 70 anyway (as long as they have benefit payment terms that will pay for that long. Shorter, two and five year benefit payment terms may dessert disabled clients long before retirement).
However, income protection policies are not designed to protect disabled people in their retirement years. (At least one product I’m aware of has an option to continue paying benefits in retirement but this requires the client to be so severely disabled that they cannot perform basic activities of daily living without assistance – relatively few clients will qualify but that doesn’t mean this benefit shouldn’t be considered).
By the time people reach retirement age, hopefully their KiwiSaver and other retirement resources, together with NZ Super, will allow clients a suitable retirement. The problem is that this theory doesn’t work well for people disabled (and unable to earn an income) for more than a very brief period because this interrupts retirement funding.
During disability, income protection benefits paid will generally be less than the client’s pre-disability income. Getting by on less than three quarters of pre-disability income will likely be tough, especially if the client’s disability comes with increased expenses, as is often the case.
Something usually has to give, and retirement savings can be the least painful to sacrifice in the short term.
On top of that, being disabled for more than a few months will likely mean KiwiSaver contributions, including employer contributions, will stop also.
Retirement provision may stop altogether during a period of disability, which may last all the way to age 65.
Even if not permanently disabled all the way to retirement, periods of disability can seriously disrupt on-going retirement provision, resulting in a significantly lower retirement nest egg.
Fortunately, there are some disability insurance solutions that can mitigate the problem: here are two possible examples:
‘Retirement Protector’ optional benefits
Consider and investigate the suitability of income cover and mortgage repayment cover ‘retirement protector’ optional benefits.
As I understand it, these optional benefits (provider dependent) will generally pay the selected benefit (a percentage of the sum insured typically) on disability:
Adding this benefit will allow continued funding of at least some KiwiSaver contributions during a period of disability.
(Advisers should confirm that any insurer they intend recommending includes policy wording and underwriting practices that will allow retirement protector benefits in addition to the usual income replacement value [75%/62.5% of total remuneration], as two insurers have confirmed to me, they will allow).
TPD optional benefits
A few providers’ income cover (and sometimes mortgage repayment cover) products include optional benefits that pay extra amounts if the client is totally and permanently disabled.
Some providers offer optional TPD benefits that pay a lump-sum benefit (equal to one or two years’ worth of the sum insured or benefit paid). Some providers offer optional benefits that increase monthly disability payments while TPD (typically monthly benefits are boosted by one third). At least one provider offers both options.
The additional benefits paid on TPD increase the ability to continue retirement funding if totally and permanently disabled.
Of course, what it means to be totally and permanently disabled (how this is defined in policy wording) is crucial. Definitions can range between ‘own occupation’ (generous) and inability to perform two out of five Activities of Daily Living (relatively few clients will qualify).
Protecting retirement with Premium Waiver Covers
Selecting providers with Waiver of Premium benefits that pay total policy premiums on disability are a significant help too.
If the whole family’s life, trauma and health insurance premiums are paid by the insurer during periods of disability, this relieves the disabled client and their family from a significant expense and hopefully allows some additional retirement provision to continue.
Once again, I’m not saying life advisers should be engaging in retirement planning or plan creation or commenting on the adequacy of KiwiSaver balances or contributions (unless they are competent to do so of course).
What I am saying is that life advisers should consider the negative impact of death, disease and disability their client’s ability to retire (and that of their spouse/partner) and how they might mitigate that risk by their insurance recommendations.
Life insurance can help ensure that clients and their survivors can still enjoy the financial retirement they hoped for despite death, serious illness and disability. Life advisers who recommend product options and strategies to achieve this, add significant value to their clients.
Steve Wright has qualifications in economics, law, tax, and financial planning. He has spent the last 20 years in sales, product, and professional development roles with insurers. He is now independent and helping advisers mitigate advice risk through training and advice coaching.
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