TPD has been engaging us recently. Claims are very few, but the condition is especially damaging financially: not only is the insured no longer earning, but they are a substantial drain on resources. On the other hand, while the working life risk of dying is substantially higher, the financial impacts are usually lower - the survivors usually resume a normal life (often creating a new household with a new partner) and they have no ongoing costs.
Part of the consideration is life expectancy after an event which would cause total and permanent disablement. The situation used to illustrate the case most often is paraplegia or tetraplegia - caused by injury to the spinal cord. So I have been reading up on papers such as these to learn more about life expectancy after the event. Here are some key points:
- 82% of these injuries occurred to males
- For those whose injury occurred after age 40, 25% will die within 18 months of the event
- For a 45-year old life expectancy thereafter was 78% of what might otherwise have been expected
Of course there are numerous other ways to become totally and permanently disabled, and each will have their own impact on life expectancy. The question of survival will affects the interaction between life insurance and income protection.
The issue to consider with regard to life insurance is a high rate of death after the incident causing the claim: A high rate of death means that you can view the additional payment for total and permanent disablement insurance as a premium merely to advance the payment of life insurance by 18 months, for example. That must be considered in the context of a terminal illness benefit which might advance it by 12 months anyway.
On the other side of the coin, a very low rate of death affects the interaction with income protection. It suggests that in any tradeoff a reduction in TPD for an increase in income protection would be valuable. However, ideally, long term disability results in capital costs and the ongoing need for income. Therefore if budgets allow then TPD and income protection are desirable.