How do I apply for Total and Permanent Disability Insurance?
One of the easiest ways to apply for Total and Permanent Disability Insurance (TPD) is to compare policies with an adviser and find a policy to suit your circumstances. However, before you do so:
Make sure you understand the different types of TPD before you apply
TPD provides a lump sum benefit in the event that you become totally and permanently disabled and are unable to work again, to help you maintain a quality standard of life. There main definitions used by insurers include:
- Own Occupation: Benefit payable if the insured is unable to perform the duties of their own occupation for a period of 6 months and is unlikely to be able to work full time in their occupation ever again. The insured will generally have to be employed in that position full time for a period of 12 months prior to making a claim.
- Any Occupation: Benefit paid if the insured is unable to perform the duties of their own occupation for a period of 6 months and then is unable to perform the duties of ANY occupation they may be suitable for following education and experience.
- Home Duties: Benefit provided if the policyholder is a full time domestic carer. This may include looking after dependent children and looking after the family home through the provision of full-time care. Provider will pay benefit if insured is unable to perform normal domestic duties for a period of 6 months and it is unlikely they will ever be able to domestic duties or any occupation ever again.
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Life Insurance companies face greater challenges in underwriting disability insurance applications than life cover because of the great variance that exists between different disabilities and the rate of disability occurring. Insurance underwriters must have knowledge of disability claims management and this may be reflected in their assessment of applicants.
What is a moral hazard?
Underwriters must also be weary of “moral hazard” whereby the policy owner takes advantage of the claim process to continue to receive disability benefits as oppose to returning to work. Certain indicators that underwriters may use in determining this include conviction for misdemeanours and inconsistent working history.
In comparison to term life insurance, the premium rates of disability insurance do not have the same gradual shape i.e. increasing with the insured’s age. Occupation plays a much greater role in how disability is perceived. For example, a fire-fighter aged 50 is much more likely to suffer an accident to librarian aged 50.
Despite women having a longer life expectancy than men, insurance claims history has found that women have a higher claim frequency to men and generally experience disablement for longer periods. This results in women paying higher in premiums to men.
3. Medical conditions
Medical impairments play a much more significant role in the underwriting of TPD insurance to that of life cover. Depending on the condition being assessed, an underwriter will generally accept the applicant with revised terms or decline the cover. As always, this is dependent on the condition and each insurer will have its own process and criteria for assessing pre-existing conditions.
Most insurers will provide revised terms to people who engage regularly in dangerous pastimes such as motor racing and skydiving. The company may choose to exclude the risk altogether or apply a premium loading.
Insurance underwriters have clear definitions in place to class different types of occupations. The occupation classes most regularly used when distinguishing occupations include;
- Higher income earning professionals
- Employment involving little manual labour. This will include management positions, clerical staff and teachers
- Qualified tradesmen, nurses and hospital workers
- Unskilled and semi-skilled manual workers
Some occupation groups are placed in special categories, as it is the role of their employers to determine their fitness for work. This includes workers engaged in civil service positions including police, fire, ambulance and armed services. These positions will generally have indemnity cover in place for disablement sustained outside of work.
- Risks relevant to specific occupations. An example can be seen with occupations where the income may fluctuate regularly i.e. writer, freelance workers and farmers (seasonal impacts).
- Self employed workers. Statistics have shown that self-employed workers often face a significant degree of stress, which may lead to disability in their first years of work. Insurers will generally only offer cover after the newly employed has been established for a period of two years.
- The applicants Duty of Disclosure. Under the applicant's duty of disclosure, they are required to disclose any information about their situation that may be relevant to the risk. In regards to occupation, the applicant will know if their occupation requires them to be placed in situations that a normal person would consider risky. The applicant must answer all questions regarding their occupation in an open and honest manner to avoid their claim being rejected.
It is worth noting that each insurance company will have their own metrics and criteria around how occupations are underwritten and what premium rates are applied. Insurance providers will generally published the different occupation classes on the Product Disclosure Statement that premiums will be applied to. Some occupations will have an extra premium loading applied based on special risks that the particular occupation carries.
An insurance underwriter will assess whether or not an applicant is going to be better off financially living on disability benefits than actually at work. There will always be a maximum disability benefit applied to encourage the disabled person to return to work. This is similar to how policy owners on claim for income cover will only be provided with 75% of their income, there needs to be an incentive for them to return to work and not take advantage of the benefit payable.
Insurers will typically ask the following questions
- Is the policyholder liable to receive any other kind of benefits as a result of their disability?
- Is the benefit consistent with the applicant’s employment role?
- Is the applicant’s income likely to fluctuate at times in their life?
- Does the applicant stand to gain any investment income that would be accessible if they were to become disabled?
1. Maximum Benefit on TPD Cover
As is the case with income protection policies, underwriters apply the rule that the benefit payment should not exceed 75% of the insured’s income though some policies will allow for excess of 75% to be paid if it is contributed to the policyholders super fund.
Most policies will offset other benefits that the insured is entitled to including centrelink or workers compensation insurance.
2. Waiting Period and TPD Premium Rates
To avoid claims for minor disabilities, life insurance companies will apply lower premium rates for longer waiting periods. This can also bring more favourable assessment terms to the policy applicant.
3. Benefit Period on TPD Applications
Medical evidence provided by the applicant will be examined closely when considering the benefit period that has been applied for. If the insured has a history of conditions that are likely to last a long period of time i.e. high cholesterol and hypertension and a benefit to age 65 has been applied for, a premium loading is likely to be applied.
Similarly, an underwriter will also consider the nature of the insured’s occupation against the benefit period applied for. A manual labourer looking to be insured to age 65 is likely to be charged a higher premium than an office worker looking for the same amount of cover.
4. Income Stability
An underwriter will assess how stable the applicant’s stream of income is when applying a premium for disability cover.
- Deliberate Acts: Benefits will generally not be provided if disablement has been caused by intentional or deliberate acts by the insured person.
- War and Terrorism: Most policies will not provide cover for disablement that is a result of war or terrorism.