Is TPD the same as Disability Income?

9 out of 10 people I speak to have not heard about disability income.

What they assumed was that total and permanent disability (TPD) is the same as disability income. But they are dead wrong.

Many folks have mistaken the different enhancements (i.e.riders) to TPD like Enhanced TPD, Deferred TPD for disability income. The riders typically refer to how the benefit will be paid out, for e.g., the number of installments and the number of years payment will spread out. In some cases, it's a lump sum. Insurers have also capped the total aggregate payout for TPD to $X million (so buying in excess is not necessarily a good thing).

Yes, you have TPD coverage and you will be compensated but what are the chances of claiming from TPD?

First, you'll need to understand the difference between TPD and disablity income.

The definition of Total & Permanent Disability means that one has to lose a pair of limbs (i.e. both arms, both legs or one arm, one leg, or both eyes) to be compensated by the insurer. This, to me, is a stringent definition to fulfill.

On the other hand, the definition of Disability in a disability income plan is tied closely to one's occupation. You need not lose an arm or leg or eyes to be compensated. As long as the disability resulting from an illness or accident renders you incapable of working to earn an income, you'll be paid the disability income.

Isn't it obvious that the latter definition is more claim friendly?

Insurers generally do not reveal their claim statistics but NTUC Income is transparent. In the month of Dec 2009, the total claim amounted to $9,294,074.00 for life insurance of which $265,138 was paid out due to TPD. This translates to only 2.9%!  Shocking but that's the truth.

Well, my readers, do not be deceived by 'fancy' TPD rider names. Get your financial planner to explain to you the definitions in your policies.

The Emerging Voice of Sound Financial Advice

An article co-authored by Sam Wadia and Karen Tang published in iFAST Insight magazine's inaugural issue -

Case Study: "Before and After" comparison after restructuring the financial portfolio of a real client

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Good financial advice can make a world of difference to your financial well-being. Read on for a real-life case study of how one client actually benefited from this.

Mr. Bryan Lee (the name has been changed to ensure the confidentiality of the client), 35, is an IT manager married to a home-maker. They have two children aged 7 and 5. He earns $8000 per month (before CPF contribution and taxes). They own a 5-room executive HDB flat, a mid-size car, and are repaying loans on both. They enjoy an upper middle class lifestyle - eating out during the weekends, buying new gadgets for their home and children, and taking annual vacations. Their life's dream is to provide a good eduction for their children and to see them happily settled, while never being a financial burden to them.

Just a year ago, Mr. Lee felt like most ordinary residents of Singapore, who believed that lifelong financial security is something reserved for millionaires, and who could not foresee a clear end to their working lives. He was luckier than those who are in an even more precarious situation - those who simple believe that their financial security has been taken care of, with just their few existing insurance policies, or some randomly purchased investments, or even their expectations of subsidies from the government when they retire. Mere belief is a dangerous thing to rely on. Instead, actively knowing all the relevant facts - with professional advice - is what is required.

Over the years they had bought quite a few insurance policies sold to them by insurance agents. Some of these agents were friends and family whom they found hard to refuse. Other agents were so persistent in following up with him, he bought policies from them almost just as a form of compensation for their time and effort. Interestingly though, once they had sold such policies, these agents went almost completely out of touch. The only communication he did receive were reminders from their companies to pay his premiums and the occasional letter informing him of a reduction in bonuses.

Mr. Lee is considered to be a conservative person who had always chosen to buy the products from agents of well-known financial institutions. Besides insurance policies, Mr. Lee had also bought a few investment products from his local banks. These were almost always spontaneous decisions which were initiated by the banks' sales staff. His investments included low capital guaranteed funds and some unit trusts that were considered 'popular' back then.

In Mr. Lee's case his 'status quo' regarding his financial holdings was finally disturbed when he received yet another notice of downward revision of bonus for one of his insurance policies. This revision was blamed on 'volatile market conditions'. At about the same time, he checked on his investments only to find that many were still under performing, even after holding them for a few years.

Mr. Lee realized that he need to seek a second opinion from a financial adviser who would be able to provide him with a holistic, unbiased overview of his entire financial situation.

In the process of interviewing him, the financial adviser uncovered the following areas that were currently lacking in his financial plan:

1. More coverage required, especially critical illness & disability.

2. Premiums paid are costly for the existing coverage amount.

3. Regular portfolio review and rebalancing are required.

4. A suitable investment plan that would suit his risk appetite.

5. A savings plan for his children's education needs.

The financial adviser also conducted a thorough analysis of his present and projected financial requirements, with the aim of deriving the required rate of return which his funds would need to grow, to meet his future financial needs.

Currently, at age 35, the amount of investible funds he has is $70,000 (in liquid assets). He is able to invest $1,500 per month for the next 25 years. He would require $3,500 per month (in terms of current dollar value) during his retirement years. He intends to retire at age 60 and wishes to plan for a life expectancy of up till age 90. During his retirement years, his money will be invested in conservative financial instruments which will give a return of about 4% per annum ( a constant inflation rate of 2% is assumed).

After a thorough analysis of Mr. Lee's financial situation, the amount of liquid funds he would need at age 60, is $1,557,300.

As for the funds required for his children's education needs, in addition to a starting capital of $25,000, he is also setting aside a separate amount of $500 a month, and he wishes to grow that amount to $25,000 in 16 years' time.

To meet his requirements, Mr. Lee needs to grow his current and regularly invested capital at an approximate rate of over 7% per annum.

To achieve his investment objectives, it was recommended that Mr Lee hold a diversified portfolio of unit trusts investing mainly in global equities. Other investment vehicles such as bonds, deposits and structured products were inadequate to attain the above rate of growth over sustained periods of time.

Once his needs and financial goals had been established, the financial adviser commenced work on scouring the market for suitable plans that not only had customer-friendly clauses but which were cost effective as well. Although the companies were not as well-known as the big boys of the industry, they were very strong financially and able to pass savings to clients by quoting lower premiums, and were also able to include legal clauses which were beneficial to their clients in their contracts.

Table 1 gives Mr. Lee's existing insurance holdings - detailing the coverage he receives and the premium he has to pay. The total cash premium that Mr. Lee forks out annually for his insurance is $12,952, for a sum assured of $390,000 for death and Total and Permanent Disability (TPD) and $190,000 for critical illness. In this situation, Mr. Lee is actually "under-insured and overpaying".

TABLE 1: BEFORE RESTRUCTURING

* Excludes the single premiums

** Excludes coverage from single premium policies.

After talking into consideration the various factors listed below, the required sum assured for Mr. Lee was derived:

1. Annual premium budget

2. Critical illness treatment expenses

3. Current and future expected income

4. Number of years of income to be replaced in case of death, disability, illness or accident

5. Liabilities

The products (as listed in table 2) were recommended. It can be seen that there has been significant savings of $5,464, or 42% of the original premium, and yet the coverage has been increased by 55% for death/TPD and 216% for critical illness.

TABLE 2: AFTER RESTRUCTURING

The single premium policies were discontinued and the amount reinvested into unit trusts, due to the following reasons:

a. Single premium Investment Linked Policy (ILP) is cost ineffective for both insurance and investment purposes.

b. He did not need the protection provided by the ILP and single premium investment products because all his needs are taken care of by the new program.

c. The cash value of the single premium investment products was redeemed and reinvested with suitable unit trusts.

Endowment policies offer a rather sluggish rate of growth and this would not be adequate for Mr. Lee's retirement funding. The cost for his insurance coverage was also considered high which was why they too were discontinued and the cash value reinvested.

Mr. Lee's revised portfolio provided him with immediate benefits:

1. Insurance plan with limited premium payment term (payment will end before he retires), and yet provides sufficient coverage for life.

2. 42% lower annual premium costs.

3. Effects of the sequence of the various catastrophic events (disability, critical illness, accidents) were considered in the construction of the portfolio.

4. Greatly increased coverage amount in his working years.

5. More 'client-friendly" legal clauses in the contract

6. A comprehensive mix of products, each positioned in light of the other, versus an almost random addition of policies.

Satisfied, Mr. Lee noted that the whole process was by far a more rational approach - a simple comparison of available options in the market that matched his needs and the selection of the most ideal option vis-a-vis his resources.

The New Emerging Financial Advisory Landscape

Ever since the enactment of the Financial Adviser Act, new independently owned financial advisory firms are offering consumers with greater choice for financial advise that is not exclusively tied to any product provider (insurance or investment company). This new entrepreneurial setup ensured that client's , rather than product provider's, interests are considered first n providing holistic financial advice. As a client and consumer, it is beneficial to know that the wider choice available can make your hard earned money work harder, if you choose discerningly.

The Weakest Link in Your Insurance Program - Disability Income Cover

Why is Disability Income Protection So Important?

I'm sure you'll agree that our wealth accumulation plans and risk management goals hinge on our ability to earn an income and actively contribute to them.

And a disruption of our income generating ability need NOT necessarily be due to either one of the 30 critical illnesses or total and permanent disability (TPD).

For example, orthopaedic-related, psychiatric issues and rheumatological conditions are not classified under critical illnesses or TPD. And these conditions can be debilitating enough to stop you from working.

Truths:

• 1 in 3 workers will become disabled for a period of 90 days or more before age 65 (source: Commissioner's Individual Disability Table A)
• The average disability absence is 2 ½ years (source: Commissioner’s Individual Disability Table A)
• 3%-4% of Singaporeans are estimated to be currently disabled and unemployed 1 in 7 workers will be disabled for 5 years or more before they reach 65 (source: http://www.stretcher.com/stories/9907261.cfm)

The impact of this disability is a loss of income, and even if you can return to work it may be to a lower paid job due to some level of ongoing disability or illness. This is the real disability cover you need to look into.

But you may ask: I am already covered, aren't I?

Many people believe they are already covered for the risk of disability. Let's look at the common misconceptions:

1. I have a policy that covers me for Total & Permanent Disability (TPD)

This only covers very severe and permanent disability. I suggest that you read the fine print definition in your policy document to understand under the circumstance under which you can make a claim. Some policies state that you need to have your limbs amputated before the insurer pays you. And it must be a pair of limbs (one leg, one arm or both legs/arms)! How often do you think this happens?? TPD protection is useful to have but falls well short of the real disability cover required.

2. I have a Critical Illness policy

Critical illness policies only cover a specific number of illnesses, usually 30. Critical illness policies work well to provide a lump sum in the event of a critical illness. But it falls short of the real disability need too.

3. I have medical insurance

Medical insurance and MediSave can help you pay your hospital and surgical bills but they do not replace your income.

4. My employer will pay me

Most employers define how long you will receive your salary in the event you are unable to work. In Singapore, this is often between 1 and 3 months, and again falls short of the real disability need too.

5. My savings or my family will help

Yes, of course you can rely on your savings or your family, provided there are sufficient funds available and you feel comfortable doing this. Unfortunately, most people do not have enough savings and most do not want to be a financial burden upon their families.

So, what can you do about it?

1. Worry

2. If option 1 is not acceptable, then you need to consider a Disability Income Plan that takes care of this gap in your protection program.

Disability Income Plans

These are specifically designed to protect against disability and will offer income replacement of around 75% of your regular income.

These plans tend to offer flexibility to meet varying needs. Hence, such plans are taken as a "standalone" plan. The rationale for this is that your need for disablilty protection is long term - if such protection is bought as a "rider" to a basic savings plan, you may find yoruself without protection if you decide to stop savings.

Hence, keep your options open and take a standalone plan.