Partial disability: Ignore it at your peril!
Most financial advisers know the difference between temporary and permanent disability. What they must realise is that the distinction between partial and total disability is equally important! The reason: South African insurers report that approximately 30% of their disability claims relate to partial disability events!
Local insurers do not report on the partial disability claims paid out as a percentage of total claims, but their US counterparts put the number as high as 50%. Meanwhile, in the worker’s compensation benefits space, partial disability accounts for two thirds of the total cost of claims.
What is partial disability?
Partial disability is where an individual is unable to perform some of the duties of his occupation, or unable to work a full day due to injury or illness. It occurs when the doctor recommends light duty for an individual recovering from treatment or awaiting surgery. Partial disability can be permanent too, as in the case of an individual with moderate heart impairment or chronic back pain.
A partially disabled person is likely to suffer a loss of income. Since most people rely on their full incomes to get by, it is important to cover this event. If you have a mandate to advise your clients’ on income protection then it is crucial to consider partial disability. Failure to do so could expose you to advice risk.
The right disability products
Partial disability is another reason not to rely entirely on lump sum disability benefits for your clients’ income protection. Apart from only covering permanent disability – which constitutes 20% of disability claims – the lump sum products only cover total disability. The only way to cover partial disability is through an income disability benefit.
Partial disability is probably the most complex of all claim assessments. It is both difficult to determine the claim amount and expensive for the insurer to administer. The result is that insurers have highly differentiated approaches to partial disability. Some determine the claim amount based on loss of income while others pay a percentage based on severity of disability.
Each method has advantages and disadvantages. Loss of income offers perfect indemnity, but requires proof of loss of income whereas sickness benefits (which require no proof of loss of income) are blunt instruments to determine the claimant’s actual shortfall. Momentum was the first insurer to introduce a best-of-both approach back in 2008.
No defined mechanisms
Some major providers have no defined mechanism to deal with partial disability. They consider partial claims "at their discretion”. This leaves the adviser to interrogate the product benefits. You must look carefully at claims definitions and determine whether they make specific provision with regards how the claim amount is determined. You cannot back a product that leaves you "hoping for the best” at claims stage.
Beware the "corridor of uncertainty”
In a mature market with tight margins you must treat products that offer significantly cheaper benefits with suspicion. An option that is excessively "cheap” is either priced incorrectly, paying fewer claims or a loss leader for that provider.
No protection here
Providers that do not make specific provisions for partial disability are in a position to pay fewer claims or stop payment earlier. If an insurer has no contractual obligation to pay a partial disability claim then nothing prevents them from stopping the claim the moment the client returns to work, even on a part time basis.
Give your clients peace of mind
Partial disability is a misunderstood risk event. Failure to cover this event can result in significant shortfalls in clients’ cover and advice risk for financial planners. Attractive rates may be tempting – but you must have peace of mind that your clients are covered under all circumstances!
Choosing a benefit geared towards paying partial disability claims, such as Momentum Myriad’s Income Protector, will alleviate the uncertainty.
