COLUMNS • INSURANCE
Is a short payment term acceptable? Steve Wright discusses income and mortgage protection term lengths and when a shorter term may be a good solution.
T
he payment term, the length of time a monthly disability insurance policy, like income protection or mortgage repayment insurance, will pay monthly benefits if you are disabled, is often something a client can select. Payment terms range from very short like six, 12 and 24 months; to medium term, five years; or long-term, to age 65 and sometimes even to age 70. Longer payment terms mean potentially higher claim benefits and accordingly, higher premium, so there can be an incentive to select a shorter payment term to reduce premium. Is this a safe strategy? If one looks at the statistics, it seems pretty clear that most disability claims are of relatively short duration, less than two years, so it might seem like a safe option to recommend a short payment term. However, there are some important issues to consider. 1 As usual, the client’s particular circumstances and needs, their financial position, their age and anticipated remaining years in the workforce and so on, all need to be carefully considered in order to make a sensible recommendation. All things being equal, shorter payment terms are likely more suitable for clients with relatively few years to retirement than they are for clients just starting their working lives.
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TMM 04 • 2021
‘If premium cost is a driving feature, can a longer wait period solve the concern?’ 2 Although many, maybe even most, clients will not experience long-term or permanent disability, some unlucky clients will – and no one knows who these unlucky clients are until it happens. The financial costs of never being able to work again are massive, the loss of income alone is likely to be a seven-figure amount for most, even those on modest incomes. Loss of such a magnitude invariably requires suitable and adequate protection. The table below shows the aggregate value (to the nearest thousand) over time, of an income lost to disability, by a 30-year-old, indexed by 5% (assuming they get annual increases of 5%).
Annual One income year
Two years
Five years
To age 65 (35 years)
$60,000 $60,000 $123,000 $332,000 $5,419,000
