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Whole of Life disability cover – what is in it for me?

03 June 2011 Liberty

Liberty Life recently launched a market first concept – disability cover for life. Previously disability cover was only available to your selected retirement age, i.e. 65 or 70. What makes Liberty’s solution so unique is that you get continuous cover which changes with your needs as you get older, thereby removing the risk of you not being covered for life’s eventualities. While this all sounds good, surely you must be asking why would I need this cover?

What is currently available?

Insurance companies offer two main types of disability cover – occupational disability cover which provides you with a cash lump sum if you cannot do your job and impairment cover which also provides you with a lump sum but where the payout criteria depends solely on medical criteria.

Traditionally insurance companies have only offered disability benefits up to retirement age. This means that cover post retirement was simply not available. When one considers occupational disability benefits this makes perfect sense – if you are no longer working it simply isn’t possible to determine whether you are able to do your job. But surely you still need cover against conditions that can disable you post retirement, when the probability of becoming impaired or disabled is so much greater?

Liberty Life agrees fully. For that exact reason we have recently launched our Whole of Life disability term option. Under this fantastic new benefit customers are provided with continuous, changing cover that adapts to their lifestyle needs. Before retirement a lump sum is paid out if you become impaired or disabled, just as before. However, at the point where you retire this lump sum converts to a monthly income instead and the assessment of whether you are disabled or not is based purely on medical definitions. What makes it even more fantastic is that this monthly benefit is paid for the rest of your life, increases with inflation each year and does not impact on any other benefits that you may have, eg life cover!

Designing a benefit to match your needs...

When developing this new benefit, Liberty has spent a lot of time trying to really understand the needs of our customers. Pre-retirement cover has been around for a long time and it is safe to assume that we understand why customers buy this – mainly to pay off any outstanding debts upon becoming disabled.

However, given that cover post retirement hasn’t really been available before, very little work has been done previously on understanding the true needs that customers face when disabled or impaired post retirement. This means we had to do some homework and through this homework we learnt that the single biggest risk post retirement is that customers are unable to function independently. If you are lucky maybe a family member or spouse can take care of you, but what if you are not or you don’t want to be a burden to your loved ones? It probably means that you would need to hire a full time nurse or caregiver, which could become quite expensive. What’s more is that your retirement savings are usually limited and extra cash is often not available, implying that this additional cost will erode any savings you may have very quickly...

Taking a deeper look at these extra costs, we know that the costs are likely to be incurred on a monthly basis, it will be incurred until the day you die and it will increase over time. Our new benefit option takes account of all three of these – a monthly income is payable, for the rest of your life, increasing in line with inflation every year.

But we also know that most people would like to leave a legacy, improving their loved ones’ financial position should they pass away. Accelerated disability cover is generally cheaper, but reduces any life cover that you may have if you become disabled. Our new benefit also aims to combat this, by automatically converting from accelerated cover pre retirement to non-accelerated cover post retirement. So you have an income until the day you die and still leave some money to your loved ones if you die – isn’t that fantastic?!?

Why is continuous cover so important?

As one gets older the probability of falling ill, becoming disabled or even dying increases significantly. Life insurance premiums are calculated using these probabilities, which means that premiums will increase as you get older. Thus the later you leave your life insurance cover purchase, the more you will pay...

In addition insurance companies also only offer cover to people who are in their opinion of sufficiently good health. This means that there is a risk, as you get older, that you may not be able to get cover if your health has deteriorated – how many 65 year olds do you know that have not had any major health issues? Alternatively, the insurer may load your premiums to allow for the additional risk of you becoming disabled in the future. This means that you may be stuck with unaffordable premiums or no cover in the years you need it most!

Insurers also have maximum entry ages, usually around 60 or 65 years. This means that even though you may want to buy cover to protect yourself after retirement, this cover may not be available to you, again leaving you without any protection.

Our new benefits protect you against all of these. Having continuous cover means that you are ensured of being protected for the rest of your life, regardless of when you may become disabled or how your health deteriorates over time. Furthermore, because premiums are calculated taking into account your whole life, there are no massive increases in premium when you reach retirement – you know upfront how much the cover will cost you and are guaranteed to be protected for life!

Selecting cover that is best for you

While everyone’s circumstances are different and the best advice is to consult a financial adviser, it is important to understand the options available to you. One major decision is the premium pattern that you should chose. Most insurance companies have two main options – level and age-rated. A level premium pattern implies exactly that – your premiums are fixed for the rest of your contract term. Age-rated premiums patterns on the other hand, allow for increases in premium each year to take into account how your probability of becoming disabled or impaired increases over time.

When deciding on the premium pattern for your cover it is very important not to simply buy the cheapest. Consider a 50 year old person. Under the level pattern his premiums will remain constant for the rest of his life. Under an age-rated or compulsory increasing pattern he will start off paying a lower premium, but in time will have to pay a significantly higher premium than if he had selected a level pattern. The question should be – can I afford a premium that high and increasing every year when I am in retirement with limited income?

Competitive premium rates

Because the new benefit options provide cover under a single policy, cover is generally very affordable relative to traditional disability cover. The table below provides a high level indication of rates for a male who purchases combined occupational disability and impairment cover. Remember as always that your age, income and health status will be used to determine the actual premium payable.

Age at entry

Level premium pattern

Age-rated premium pattern

To retirement only

For whole of life

To retirement only

For whole of life

30

122

132

84

90

40

250

270

134

146

50

534

658

350

378

60

928

1,334

912

1,038

What should I do next?

Contact an authorised financial adviser to learn more about the new benefit and whether this will meet your needs.

If you are an existing Liberty policyholder, also remember that you have the option to convert your existing lump sum disability benefit into the Whole of Life term option – contact your financial adviser or Liberty Life on 0860 327 327 to learn more.

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