Weighing up day one accident cover

Col Fullagar takes a look at Day One Accident cover within income protection policies and considers its pros and cons.

Income protection insurance provides for the lifestyle of the insured to be protected by way of payment of the insured benefit amount, with payments commencing after the expiry of the chosen waiting period.

But sometimes a client’s circumstances may be such that they may need benefits to start immediately. Therefore, there are a number of ancillary and optional benefits available that provide for benefit payments to be made during the waiting period.

One optional benefit that has proven popular over many years is Day One Accident, which appears in the market under a variety of names: Accidental Injury Option, Accident Benefit Option, Day Four Accident, and so on,

It provides for the benefit amount to be paid for all or part of the waiting period if the life insured is disabled as a result of an accident and the disability lasts for longer than a set number of days (usually three).

While there is considerable adviser support for this benefit (appropriately driven by consumer demand) for due diligence reasons the question needs to be asked: ‘Does Day One Accident represent poor value for money or is it a real value-add benefit?’

Cost

The first aspect of value, but not necessarily the most important, is of course the cost of the benefit.

The Day One Accident yearly premium from one insurer for a monthly benefit of $5,000, for a male non-smoker, working in a skilled, blue-collar occupation is shown in table 1.

Clearly, the cost is not inconsequential.

Day One ancillary benefits

Built into many income protection insurance policies are several ancillary benefits that also provide immediate coverage and to varying degrees these benefits overlap Day One Accident. These ancillary benefits include:

• The Scheduled Injury Benefit, which provides three areas of cover, each of which must be caused by an injury as defined in the policy:
• Paralysis — payment period of 60 months;
• Benefits triggered by the permanent loss of or loss of the use of, the hand, arm, leg or sight in the eyes — payment period usually between six and 24 months; and
• Benefits triggered by the defined fracture of the thigh, pelvis, leg, etc — payment period usually between one and three months.
• The Bed Confinement Benefit, which provides cover for three months, or the expiry of the waiting period if less, if the client is confined to bed in a medical facility or at home under the care of a registered nurse. The confinement must be for a minimum of three days but it can be due to either a sickness or an injury; and
• The Crisis Benefit, which provides up to six months cover for various defined events, primarily illnesses such as cancer, heart attack and stroke — but often accidents are included such as major head trauma, severe burns, loss of limbs, etc.

As these benefits are standard in many comprehensive income protection insurance policies, the client is already paying for these components of cover.

If Day One Accident is added, part of the additional premium may therefore be for duplicated cover, bearing in mind that payment would only be made under one or the other but not both.

To counter this cost duplication, when pricing products actuaries may seek to adjust the Day One Accident premium down; however, as premiums are experience-based estimates, precision will not be possible.

Accident/sickness claims

Day One Accident has traditionally been seen as a benefit geared to the blue collar, self-employed market where in many instances people do not have access to sick leave. It is therefore an attraction for them to have cover from the first day they are unable to work.

Unfortunately, by definition, Day One Accident only provides for the early payment of benefits if disability arises as a result of an accident. If the client is disabled as a result of a sickness, benefit payments do not commence until after the expiry of the waiting period.

Table 2 shows, the chance of disability being caused by an accident compared to disability being caused by a sickness. For many ages and occupations, the chance of a sickness leading to disability is greater.

The above calls into question the wisdom of recommending enhanced cover only for accidents. However, to the extent that Day One Sickness is not available, provided the adviser clearly informs the client of what is or is not covered, then it is up to the client to make that informed choice.

Protection alternatives

According to Asteron, a male non-smoker, age next birthday 35, would have a 15 per cent chance of claiming under a Day One Accident benefit in the first five years of the policy duration.

If the client accepted this risk and self-insured, the cost of the Day One Accident option could be redirected into a low-cost savings vehicle.

The maximum payment under Day One Accident is 30 days benefit. Enquiries with several insurers found that the average claim duration under Day One Accident was between 25 and 29 days — in other words, very close to the maximum.

Assuming a 4.25 per cent compound interest rate, and annual level contributions of $600, ING Direct would accumulate funds to $3,500 over a five-year period and $5,000 over a seven-year period.

In other words, by accepting the self-funding risk of say between 15 and 20 per cent over a five to seven year period, the client would be close to being able to self-fund the Day One Accident benefit. As self-funding continued the client’s position would become increasingly secure.

Another advantage of self-funding is that the accumulated funds would be available to the client not only for accidents that led to a cessation of work but also for sicknesses.

Also, the funds could be retained and left to accumulate further if the sickness was covered from day one under one of the ancillary benefits included in the policy.

Self-funding may eventually lead to the client being able to afford a longer waiting period, bringing about a further premium reduction or acceleration of self-funding if the premium saving was redirected to the savings vehicle.

On the other hand, an advantage, of Day One Accident is that multiple claims are allowed. While the basis of multiple payments is not always made clear in the policy, it would be reasonable to assume that only one payment per claim would apply.

Of relevance also, is the fact that premium payments for the Day One Accident would generally be tax deductible whereas contributions into a self-funding vehicle may not be.

Definition of accident

The pros and cons of Day One Accident may be complicated even further if cover is enhanced for accidents over sicknesses, because the insurer will need to ensure there is a clear distinction between the two.

To achieve this, some insurers will implement a more restrictive definition of accident than would otherwise be the case (eg, the accident needs to be caused by ‘external, violent, visible means’).

The risk is that this could lead to the client’s understanding and the insurer’s interpretation differing leading to a dispute at the time of a claim as to whether the Day One Accident cover actually applies.

For example, the client has a pre-existing back condition, bends to pick something up and hurts their back. Is the cause a sickness (a degenerative back condition) or an accident caused by the lifting of the object?

The last thing the client and the adviser need is for a claim dispute to arise.

Summary

The main points to consider when considering the Day One Accident are as follows:

• The Day One Accident option has a reasonable cost associated with it;
• There is potential for an overlap in cover between Day One Accident and some standard ancillary benefits;
• The alternative of self-funding can be attractive;
• Self-funding provides protection in the event of a sickness as well as an accident;
• The chance of being disabled by a sickness is generally greater than the chance of being disabled by an accident;
• There is a risk of dispute if the definition of accident is not clear;
• Multiple payments under Day One Accident are possible;
• A Day One Sickness benefit is not available;
• Day One Accident premium would generally be tax deductible; and
• Day One Accident does provide a level of additional cover.

Clearly, the merit of a Day One Accident option is not clear-cut.

Ultimately, the recommendation is up to the adviser and the decision to accept or reject the recommendation is up to the client.

The adviser may even recommend a self-funding option be put in place together with Day One Accident with Day One Accident being phased out as the level of self-funding increases.

Whatever the outcome, it is important for the adviser to know the pros and cons of this optional benefit.

Col Fullagar is national manager for risk at RI Advice Group.