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Category Life Insurance

Putting the pieces together again...

22 January 2004 Rianet Whitehead

When deciding whether a client needs disability or impairment cover, the intermediary needs to assess which type of cover is most appropriate to protect that particular client against a loss of income based on an understanding of when and how much each be

QUESTION: Which to recommend - a disability or impairment benefit?

The intention of both a disability benefit and an impairment benefit is to protect a client against a loss of income. However, the criteria on which these two benefits are paid differ, and as such they are different benefits. It is important that intermediaries understand when each type of benefit pays, and how much is paid, in order to best advise their clients. Here are some answers on frequently asked questions.

QUESTION: What is a “disability benefit”?

In the insurance context, disability refers to the gap between what a person can do and what they need to do with regard to occupational demands. A disability benefit therefore financially protects a person against the risk of becoming permanentlyunable to perform the duties of a specific or similar occupation.

A disability benefit claim will therefore depend on his ability to continue earning a living from his own or a similar job; so a person with a moderate loss of heart muscle function will probably be able to do administrative work, but will not be able to do manual labour as the demands of the job are different.

It is important to remember that there are different levels of occupational disability, based on how broadly the occupationcover has been defined, which need to be taken into account when selecting the most appropriate type of disability cover for a particular person.

QUESTION: What is an “impairment benefit”?

Impairment refers to a loss of function in any part of the body, whether it is physical or mental. It influences the functioning of the whole person and not just a particular limb or system.

An impairment benefit claim will ignore what a person does for a living. This benefit will cover a person’s loss of earningsshould they suffer from an impairment that is covered under this benefit. The impairment benefit paid will depend on the severity of the impairment to the functioning of the whole person.

QUESTION: Which benefit is appropriate when?

As impairment and disability benefits provide different cover, the client should consider which type of cover is better suited to his or her needs. A lump sum disability benefit is appropriate for the client who wants to protect against a loss of income as a result of a permanent inability to perform their own (or similar) occupation. Here the person has thepeace of mind that the benefit will be paid out should they be disabled in terms of the policy definition. In assessing
disability, formal guidelines issued by the LOA are applied so this is not a haphazard process. An impairment benefit will be most appropriate for people who, as a result of their occupation, do not qualify for a traditional disability benefit. These tend to be the more manual occupations. Again, the intention is to replace the loss of income that results from an impairment covered by the benefit, and not for the client to receive a financial windfall as a result of an impairment.

SUMMARY

When deciding whether a client needs disability or impairment cover, the intermediary needs to assess which type of cover is most appropriate to protect that particular client against a loss of income based on an understanding of when and how much each benefit will pay. Substituting one for the other without explaining the consequences to the client is something that should be avoided at all costs since they do provide different benefits and depending on the circumstance, a person could qualify to receive benefits on one policy and not the other. The optimal solution is for a financial adviser to recommend a benefit that provides a combination of both disability and impairment cover, thereby ensuring that their client does not experience any gaps in their cover in the event of a valid claim. This type of combination benefit has recently been launched by one of the major Life Offices and offers the best of both worlds.

QUESTION: Which to recommend - a disability or impairment benefit?

The intention of both a disability benefit and an impairment benefit is to protect a client against a loss of income. However, the criteria on which these two benefits are paid differ, and as such they are different benefits. It is important that intermediaries understand when each type of benefit pays, and how much is paid, in order to best advise their clients. Here are some answers on frequently asked questions.

QUESTION: What is a “disability benefit”?

In the insurance context, disability refers to the gap between what a person can do and what they need to do with regard to occupational demands. A disability benefit therefore financially protects a person against the risk of becoming permanentlyunable to perform the duties of a specific or similar occupation.

A disability benefit claim will therefore depend on his ability to continue earning a living from his own or a similar job; so a person with a moderate loss of heart muscle function will probably be able to do administrative work, but will not be able to do manual labour as the demands of the job are different.

It is important to remember that there are different levels of occupational disability, based on how broadly the occupationcover has been defined, which need to be taken into account when selecting the most appropriate type of disability cover for a particular person.

QUESTION: What is an “impairment benefit”?

Impairment refers to a loss of function in any part of the body, whether it is physical or mental. It influences the functioning of the whole person and not just a particular limb or system.

An impairment benefit claim will ignore what a person does for a living. This benefit will cover a person’s loss of earningsshould they suffer from an impairment that is covered under this benefit. The impairment benefit paid will depend on the severity of the impairment to the functioning of the whole person.

QUESTION: Which benefit is appropriate when?

As impairment and disability benefits provide different cover, the client should consider which type of cover is better suited to his or her needs. A lump sum disability benefit is appropriate for the client who wants to protect against a loss of income as a result of a permanent inability to perform their own (or similar) occupation. Here the person has thepeace of mind that the benefit will be paid out should they be disabled in terms of the policy definition. In assessing
disability, formal guidelines issued by the LOA are applied so this is not a haphazard process. An impairment benefit will be most appropriate for people who, as a result of their occupation, do not qualify for a traditional disability benefit. These tend to be the more manual occupations. Again, the intention is to replace the loss of income that results from an impairment covered by the benefit, and not for the client to receive a financial windfall as a result of an impairment.

SUMMARY

When deciding whether a client needs disability or impairment cover, the intermediary needs to assess which type of cover is most appropriate to protect that particular client against a loss of income based on an understanding of when and how much each benefit will pay. Substituting one for the other without explaining the consequences to the client is something that should be avoided at all costs since they do provide different benefits and depending on the circumstance, a person could qualify to receive benefits on one policy and not the other. The optimal solution is for a financial adviser to recommend a benefit that provides a combination of both disability and impairment cover, thereby ensuring that their client does not experience any gaps in their cover in the event of a valid claim. This type of combination benefit has recently been launched by one of the major Life Offices and offers the best of both worlds.

Quick Polls

QUESTION

Financial behaviour experts suggest that today’s risk modelling methodologies ignore your client’s emotional ability / behavioural capacity. What are your thoughts on spicing up risk profiling tools to make allowance for your client’s financial behaviours

ANSWER

[a] Bring it on; my client’s make too many irrational financial decisions
[b] Existing risk profiling tools are adequate
[c] Risk profiling tools should be based on the model / rational client
[d] The perfect risk profiling tool is science fiction
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