6 secrets you need to know before you get disability insurance

Personal insurance can be a minefield.

• 84% of people don’t have monthly-paying disability cover in New Zealand.
• 81% don’t have critical illness cover.

If you were unable to work due to accident or illness, how would you household survive financially?

Do you understand why you should have disability insurance?

In my experience, most people know they should have this cover. But most people do not want to think about worst-case scenarios. Most people will actively avoid thinking about worst-case situations.

I get it. I understand. But…

Sticking your head in the sand won’t help you when the proverbial smacks your butt.

I called them “6 secrets…” to get your attention. Now I’ve done that, let’s get to it. Yes, personal insurance can be a minefield. But having professional and personalised advice will make the process easier. This not personalised advice by-the-way. I don’t know you. But I will outline some simple concepts so that when you speak with your adviser, you can have a robust chat about things that are relent to you. Ready?

1). What is the financial risk that you are insuring for?

Seems simple enough, we can think of the worst possible circumstance and then put something in place to minimise the financial damage. However, sometimes things are not that bad. So, do you need to the gold-plated, deluxe all-you-can-eat platter? Or is there a mid-point that is kinder to your bank balance?

The key thing with this type of protection is, you are managing the risk that you lose your income, either partially, temporarily or permanently. The following three points all link off this one…

2). Permanent & total disability or temporary disablement
One pays you a lump sum, the other pays you monthly for a nominated amount of time (2 years through age 65 and beyond). Both serve a purpose. Both come at different costs. Check out my article here about keeping the costs down on monthly paying benefits.

Statistically, we know that the majority of people will be back to work after accident and illness within 18-24 months. However, do you want to take the risk that you might be one of those rarer cases who are permanently disabled?

This is not an either-or situation. You can have both and structure your cover to still maximise your protection while being kind to your monthly expenses.

3). How much income is to be replaced…?

With the monthly paying benefits, the maximum amount you can protect is 75% of your gross earnings. There are conditions and caveats that I will not go into here. That said, if you are accustomed to living with a certain level of income, what would happen if you even lost 25% of it? Could that hurt your family. Now imagine that you don’t even have the basic cover in place. How do you replace 100% of your income?

With TPD, or what we know as permanent disability, the target amount is harder to gauge. For some, they will calculate how many years of potential working life they have, multiply that by their annual income, and that will be the amount. For others, they will just use their income multiplied by a few years, added to a debt repayment amount. This clears their debt and gives them a buffer a few years. You can obviously do less or more as your situation, budget and risk protection goals allow.

4). Short-term or through to retirement (what is the replacement value in years…?)

Similar to the point above, are you looking to replace your income for a couple of years or much longer?

Remember the longer you insure for and the larger the benefit (the amount you get paid), the higher your monthly premium. If you want that gold-plated all-you-can-eat platter, then you will need to pay for it.

In my experience, many people want the best, but will settle for what they can comfortably afford if it matches their key goals.

The challenge for you, is to determine what your key risk protection goals are. This is where an experienced and professional insurance adviser will help you.

5) Don’t forget the home executive – who looks after the kids and runs the house?

Many times I see families where the main income earner is thinking about themselves and their ‘financial contribution’. This is great and a good way to start the analysis process. However, family units have contributors in others ways. Looking after the home and children, while not producing an income, is still a vital activity and central to the family nucleus.

What happens if that person is incapacitated? Who looks after the kids and the house then? The income earner? But then where does the income come from…?

While we tend to focus on pure financial risk management, having a broader perspective on the family can be just as worthy. Financial risk can impact from different sources. At least think these risks through and discuss with your significant other. Create a plan that suits the family and not just one person.

6). You don’t have to get it perfect first time.

Insurance is a moving target. Life changes, stuff happens, circumstances will force you to make different choices. What is relevant to you today will not be the same in 5, 10 or 15 years’ time. That is ok. That is part of the gig. Be flexible in your expectations.

As I have mentioned a few times, personal insurance can be a minefield. Knowing how much life insurance, disability insurance, income protection or mortgage repayment cover is required, is just one aspect. Each insurance product has their own unique characteristics. And each insurance provider has their own particular pros and cons. The top providers work hard to make sure their products have a unique spot in the market. Your professional insurance adviser will help you navigate those differences, so that they find you the right protection, matching your circumstances to your budget.