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Trends in disability benefits

01 August 2011 Marcus Pillay, GenRe

The traditional individual life occupational disability product has two flavours: a lump sum payout or a payout as a stream of income. While occupational definitions are a good match for the inability to work, what is less clear is whether lump sums shoul

Disability benefits attempt to provide financial compensation to claimants when they are no longer able to generate an income. This is achieved by paying out a lump sum or providing income benefits that match the lost income.

Lower risk

Income benefits do so at lower risk to the claimant than lump sum benefits do, not only by providing a stream of income, but also by removing the risk of the claimant running out of money before retirement, which is why the benefit should be chosen to escalate by the inflation rate.

Innovations

Sales of lump sum products continue strongly. The sales of disability income products, while increasing, are still significantly lower than those of lump sum benefits. As a result, the individual life market has introduced some innovations in income disability products over the last few years.

Improvements that have been made by various product providers include increasing the percentage of pre-disability income that can be claimed; setting out criteria for the automatic payment of benefits (not subject to the occupational definition); providing additional payouts on return to work; and allowing for payments on the occurrence of the most severe illnesses.

Seven-day waiting periods, which are particularly beneficial to the self-employed, have been introduced, as well as products that cover disability for up to two years, providing some time for recuperation. There are also income products which offer benefits after retirement to those who have claimed before retirement, provided, of course, that the former claimant is still alive.

Further advantages

Income disability benefits offer further advantages over their lump sum counterparts: they allow for multiple claims from different causes; the policy remains in force even after the policyholder returns to work; and short-term as well as permanent disabilities are covered. Some insurers have processes in place to help claimants get back to work. This encourages the claimant to resume a productive life and reinforces the message that disability need not be disabling.

Shortcomings

Income disability benefits do have some shortcomings. Chief among these is that often only 75% of the lost income is replaced. While there are sound actuarial reasons for this, a number of providers have enhanced their income benefits to offer 100% of the pre-disability income during claim, but additional conditions usually apply to the payment of these kinds of benefits.

Benefits of lump sum payments

Although they only make payments in the event of permanent disability, lump sum benefits provide cash up front to successful claimants. This provides flexibility in financial planning in the event of permanent disability. This financial flexibility is valuable and appreciated by policyholders and claimants alike.

Lump sum products are also generally cheaper than their income cousins. Where affordability is an issue, they make possible some cover, rather than none at all. And, in certain circumstances, only lump sum benefits are appropriate, for example, where business loans or ownership shares are involved.

Coexisting comfortably

While not traditionally favoured, income disability benefits are gradually being appreciated for their all-round effectiveness in meeting client needs. Lump sum disability benefits should continue to attract their share of the market, thanks to improved understanding and their perceived lower cost.

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