Whist it is appropriate to plan for retirement and premature death, it is also important to protect one’s earning capacity, whether as an employee or self-employed.
You could lose the earning power should you become disabled as a result of injury or sickness. If that happens, you are likely incapable of paying premiums to keep your life plan in force. On top of this, your family’s current expenses need to be paid and these expenses may even increase as a result of your medical treatments or the need to employ a personal nurse to take care of yourself. In addition, you may still have outstanding loans to repay. Most of the time, such families will be financially worse off with the incapacity of the bread-winner than they would be had the bread-winner died.
A Disability Income Insurance (DII) would be a useful insurance protection, income protection, to help safeguard a person’s earning capacity in the above situation.
DII is also known as Income Replacement Insurance. It is designed to help you to maintain you and your family’s standard of living. It provides a regular monthly income to cover your expenses in the event of a disability due to illness or accident. [Refer table below to understand between DII & Total Permanent Disablement (TPD)]
DII
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TPD
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Can be issued on a stand-alone basis or as a rider
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Usually incorporated into life policies. Can also be issued as a rider
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Max sum assured is a %age of the monthly salary
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Sum assured not pegged to salary
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Escalation benefit available
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No escalation benefit
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Partial disability benefit available
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Partial disability benefit not available
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Choice of deferred period
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No deferred period (only proof of TPD)
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For working adults only
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Available to both people who are working and not working
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Provides income replacement
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Accelerates the death benefit payable under a life policy
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Benefit payable on a monthly basis
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Benefit could payable in installments
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If you were sick or hurt tomorrow and wouldn’t go to work…
how long could you live on your savings? .
There was an adviser, call “John”. He has a strong conviction and work very hard as a life insurance adviser with an insurance company. As usual, he did a complete life insurance programming for this particular client. “Mr. Tan” was impressed with his conviction and his presentation on what life insurance can do for him. After policy delivery, he thought to himself, another job well done; another family well protected.
After 2 years, Mr. Tan was diagnosed with an unusual disease which affects his nervous system. He was hospitalized for medical examinations and unable to go to work for a long period of time. They could not find any cure for this unusual disease. As the medical bill was escalating, the family decided to bring him home and take turns to nurse him.
John went to paid him a visit. There, the property agent was there to discuss the selling of their home. The wife was completely distraught and crying. His son who was in his 2nd year of undergraduate studies decided to quit the faculty and to take a job that he could help out with the household expenses.
John saw Mr. Tan lying on his bed… destitute, penniless, helpless. John was wondering: “What do you say to a man like this?” “How do you comfort him?” John mumbled a few vague words and left as quickly as possible. With a heavy heart, he left for his office and work out his “balance sheet” for Mr. Tan, as follows:
- Here is the man who bought life insurance for last expenses; but didn’t die.
- He bought life insurance for guaranteed income to his widow; but he doesn’t have a widow; he has a wife.
- He bought life insurance for the savings which could be had; but they are long since gone and his new policy has not accumulated any.
- He bought life insurance to guarantee the mortgage on his home; but he lost his home anyway.
- He bought life insurance to insure the college education of his son; but his son didn’t even finish his university.
- He bought life insurance to guarantee a pleasant retirement; he won’t live that long.
John has helped his clients to understand what life insurance can do, but life insurance has its limitations. Though Mr. Tan has medical coverage, it does not cover all expenses.
[1] So what measures could he have taken to protect the value of his earning power?
[2] How much money will he need in such a situation?
[3] Where is the money going to come from?
Let’s do the sum.
Assuming “Joe” is 35 and currently earning $5000 per month. Between now and his age of 65, he stands to earn [(65-35) x $5,000 x 12] $1,800,000 and could have accumulated assets (house, car, CPF, Savings, etc) which going to worth about $1,000,000. Assuming the annual premium for DII is estimated $2,000, this premium is about 0.2% of his potential growing net worth. So does it make sense to insured his income potential?
