Benefiting from home duties TPD insurance

Col Fullagar outlines the much-overlooked ‘home duties’ total and permanent disablement (TPD) cover and examines the criteria for those who can benefit from its protection.

Much has been written over the years about the total and permanent disability (TPD) benefit: some complimentary, some less so.

Is it value for money?

Does it still have a place in a risk insurance recommendation or has it been replaced by trauma insurance?

Will it be there when needed, or are claims rarely paid (and if paid, only after a protracted claims management process)?

Regardless of its accuracy, what has been written usually only refers to standard TPD – that is, the cover that applies to someone who is gainfully employed and is seeking protection under an ‘own occupation’ or an ‘any similar occupation’ definition.

But another type of TPD cover does exist, and it is known as ‘home duties’ TPD.

In broad terms, home duties TPD is a risk insurance product, the perceived intention of which is to pay a lump sum if the insured person, as a result of a sickness or injury, is permanently unable to perform ‘home duties’.

Home duties TPD receives little attention, and recent enquiries with insurers revealed the low take-up rate for the product is in line with the attention it receives.

But does it have a place in an adviser’s product arsenal or would the risk insurance product range be appropriately simplified if it were deleted?

There is no denying that a market for this type of product exists, since the Australian Bureau of Statistics estimates that in 2009 of the 17 million Australians aged 15 years or over, almost 5 million were not in the workforce and of these, 22 per cent or around 1.1 million, reported their main activity as home duties.

The need

The market for home duties TPD is people who are in a (generally) non-remunerated role using their personal exertion to undertake a range of functions called home duties – the purpose of which is associated with the maintenance of their place of residence and, if applicable, the care of their family.

The market can include both men and women, in and not in a life relationship, with or without dependants. If someone performing home duties were permanently unable to continue doing so as a result of a sickness or injury the alternatives would include:

• Stop having the functions performed;
• Have another family member perform some or all of the functions; or
• Pay for and organise someone or a range of people to undertake the functions.

For the sake of this exercise, it will be assumed that the first alternative is impractical. It would be difficult to imagine the functions performed under the heading of home duties not being required.

The second alternative may be practical in the short-term and also practical in respect of another family member performing some of the functions, but it would be impractical on a permanent basis.

Other family members will have their current roles to perform and also they are likely to have to take on additional work caring for the permanently disabled insured person.

The second alternative would be even more impractical if there were no other family member (eg, the insured was a solo-parent or a full-time carer).

The most practical solution will therefore often be to pay for and organise someone or a range of people to undertake those functions previously performed.

The range of duties undertaken varies between individuals; however, it can include some, all or others in addition to those set out below.

• Shopping;
• Cleaning the home, for example vacuuming, dusting and cleaning floors;
• Changing the bed linen and the annual spring clean;
• Washing, drying and ironing clothes and putting them away;
• Caring for children including bathing, dressing and counselling;
• Nursing members of the family when they are ill;
• Acting as a carer for an elderly or disabled relative;
• Preparing meals and clearing and cleaning up afterwards;
• Minor repairs to and general maintenance of the home;
• Gardening, pruning, mowing the lawns;
• Looking after the family pet(s), walking, feeding and washing;
• Providing transport for family members;
• Organising and supervising tradespeople to undertake repairs and maintenance;
• Looking after the family finances; and
• Entertaining family and friends.

If home duties cannot be performed, a replacement cost will be incurred in having someone or several people undertake the functions.

Part of the lump sum payable under home duties TPD might be invested with the subsequent revenue stream being used to meet the above replacement costs.

If the replacement costs were conservatively estimated to total $75,000 a year and the life insured had a remaining life expectancy of 20 years, this would equate to a present day lump sum of around $1 million (assuming a 5 per cent interest rate).

But someone who was performing home duties who was rendered permanently unable to continue to do so and who also satisfied the other criteria for claim payment (set out later in this article), will face significant, additional direct expenses in areas such as:

• One-off and ongoing medical expenses not covered by health insurance ($50,000);
• Relationship counselling arising from the effects of the sickness or injury ($5,000);
• Repayment of debt that can no longer be serviced (say, $200,000);
• Rehabilitation costs ($25,000);
• Capital costs associated with changes to the home or car, possibly even a more practical home or car ($100,000);
• Costs associated with attending medical appointments ($1,000 a year for 20 years = $20,000); and
• Personal nursing care ($30,000 a year for 20 years = $600,000).

The amounts in brackets are estimates of allowances that might be made for the above. The total of the amounts in parentheses is $1 million.

And finally, there will the opportunity costs incurred by way of loss of productivity from other family members who may have to:

• Stop work to care for the life insured;
• Stop work to organise others to undertake the functions previously performed by the life insured; and
• Have their attention diverted as they contemplate how to assist the life insured.

Assuming the family member is earning $150,000 a year and there is a conservative 10 per cent productivity reduction, over 20 years this would equate to a loss of around $500,000 (assuming 5 per cent inflation).

The total of the above amounts is staggering.

The replacement costs, direct expenses and opportunity costs will naturally vary between individuals, which is where the skill set of the adviser will be pivotal.

Is there a need for home duties TPD? The answer is a compelling ‘yes’.

The definition

Having assessed the need, the product itself should be considered to see whether it is appropriately designed to satisfy the need.

Home duties TPD is one of those products for which the perception of the criteria for payment and the reality will likely differ. This is never a good starting point in the advice process so there is merit in looking at the definition in detail.

Set out below is a home duties TPD definition that contains components of cover reasonably typical of the market.

Total and permanent disability means that, the life insured, where wholly engaged in full-time unpaid domestic duties in his or her own residence:

• Has been unable to perform normal domestic duties, leave home unaided and engage in any employment for an uninterrupted period of at least six consecutive months solely as a result of injury or sickness;
• Is attending a medical practitioner and has undergone all reasonable and usual treatment including rehabilitation for the injury or sickness; and
• At the end of the period of six months, after consideration of all the medical evidence and such other evidence as we may require, has become in our opinion incapacitated to such an extent as to render him or her likely to require indefinite ongoing medical care and unable to ever perform normal domestic duties, leave home unaided and engage in any form of employment.

Disputes at the time of claim may arise for various reasons, but one of the most common is when the criteria for claim payment lack clarity.

Looking again at the above definition reveals aspects of the cover that may not be immediately obvious or may not, in fact, have been intended by the insurer.

This can lead to confusion about the meaning and the interpretation.

Total and permanent disability means that, the life insured, where wholly engaged in full-time unpaid domestic duties in his or her own residence

If the insured is not ‘wholly engaged’ does this mean the cover will not apply?

How will ‘wholly engaged’ be interpreted?

Would the insured be less than ‘wholly engaged’ if they were working part-time for a few hours a week in a gainful occupation?

What would be the position if they were working in an unpaid, voluntary role?

Does ‘full-time’ mean the insured must be engaged for a certain number of hours a week?

And if so, why not state that?

If standard TPD is only available to those working in excess of 20 hours a week, and home duties TPD is only available to those wholly engaged in home duties, what is available for that group of people in between the two?

And finally, if someone who was engaged in ‘full-time unpaid domestic duties’ affected a policy and then altered their status to something other than ‘full-time unpaid domestic duties’, what impact would that have on cover?

Has been unable to perform normal domestic duties

To what does ‘normal’ refer? Is this the so-called generically normal domestic duties or those domestic duties specifically normal to the insured, and does normal ‘domestic duties’ differ from ‘full-time domestic duties’, a phrase used earlier in the definition?

If someone was suffering from a long-term debilitating condition, would the ‘normal domestic duties’ be those in which the person was engaged immediately prior to the condition starting or immediately prior to the claim being made?

And does the inability to perform normal domestic duties mean every aspect of those domestic duties or only the main or ‘important’ aspects of them?

[Is unable to] leave home unaided

Does ‘unaided’ mean without the assistance of another person or without the assistance of a device such as a walking stick or a wheelchair? And, having left the home, is it necessary for the ‘aid’ to continue while they are out of the home?

[Is unable to] engage in any employment for an uninterrupted period of at leas six consecutive months solely as a result of injury or sickness

Notwithstanding there was a previous requirement that the insured be engaged in ‘full-time domestic duties’, the insured must be ‘unable’ to engage in any employment (ie, full-time or part-time, remunerated or non-remunerated).

Is attending a medical practitioner and has undergone all reasonable and usual treatment including rehabilitation for the injury or sickness

The requirement to undergo ‘all reasonable and usual treatment’ can open up a Pandora’s box of subjective interpretation.

Whose interpretation of ‘reasonable’ will apply?

The client, the client’s doctor, the insurer’s or their chief medical officer’s?

What if differences of opinion arise between the client’s own medical practitioner and the chief medical officer?

What does this do to the various legal obligations that apply to both medical practitioners and the various other parties?

Does the word ‘reasonable’ take into account genuine religious or cultural issues, geographic issues or monetary issue?

It would be ironic if someone could not afford ‘reasonable’ treatment because the claim was not being paid!

The TPD definition already has an inbuilt six-month waiting period. However, the need to undergo ‘all reasonable rehabilitation’ could extend the waiting period for many more months or even years.

At the end of the period of six months, after consideration of all the medical evidence and such other evidence as we may require, has become in our opinion incapacitated to such an extent as to render him or her likely to require indefinite ongoing medical care

While it may generally be the case that someone who is permanently incapacitated cannot work or perform home duties, it is not always the case.

Even if ongoing medical care was necessary, the use of the word ‘indefinite’ adds a definitive requirement that appears to add no real value other than subjectivity and the potential for dispute.

What would be the position if a medical practitioner stated that ‘medical care is needed for at least the immediate future’?

Would rehabilitation be considered ‘medical care’ or would the fact that rehabilitation and medical care mean they would be considered as separate issues?

Is unable to ever perform normal domestic duties

Recent debate about TPD definitions has focused on the difference between the words ‘unable’ and ‘unlikely’ within the definition, but both words are used within the same definition above. Will this cause assessment complications?

[Is unable to] leave home unaided and engage in any form of employment

The insured may satisfy all the other criteria within the definition in regards to inability to perform domestic duties, leave home unaided and requiring indefinite, and ongoing medical care.

But if in the future it is possible that they would be capable of performing any employment – paid or unpaid, part-time or full-time – they would fail to satisfy the last criteria of the definition.

There would clearly appear to be some issues of clarification needed in regards to the practical operation of the cover provided.

The advice

Advise on product pros and cons

While someone engaged in performing home duties may not be able to obtain traditional TPD insurance, it is not necessarily a safe practice for an adviser to simply put home duties TPD in place in the basis that there is nothing else available.

The client should be told what is and is not covered, as well as the pros and cons of the cover.

Without this information the client may invest their premium dollars in the product at the expense of alternative cover or enter into a third-party financial arrangement in the belief that home duties TPD will provide more comprehensive protection than it actually does.

If the client suffers a financial loss as a result, the adviser may be implicated.

Fact-finding

In arriving at a benefit amount recommendation, there would be merit in undertaking appropriate questioning within the fact-find such that an informed recommendation can be made rather than simply putting in place a standard amount for all clients involved in performing home duties.

Trauma insurance alternative

There may be a temptation when considering the need to bypass home duties TPD and instead recommend trauma insurance.

Trauma insurance may be a sound complementary product recommendation, but it may be a risky replacement recommendation.

There are numerous sicknesses and injuries that will render someone permanently unable to perform ‘home duties’ that are not insured events under traditional trauma insurance.

Also, it is theoretically possible, although less likely than with standard TPD, that someone could suffer a trauma insured event at a level of severity that did not trigger a trauma insurance payment, but which did render them permanently unable to perform ‘home duties’.

Claim subjectivity

It may be prudent to point out to the client that there is some subjectivity and a lack of clarity in the definition of home duties TPD and that this may add a level of complexity to the claims process.

Better to flag this ahead of time than to wait until it occurs at the time of a claim.

While this is less than satisfactory, it could be pointed out that notwithstanding some of the negatives, the need for risk insurance protection is compelling and the product being recommended is considered to be the most appropriate available to satisfy that need.

Typical maximum cover levels available for home duties TPD are around $2 million.

What it means for advisers

At first glance, there may be a temptation to gloss over the inclusion of home duties TPD in a risk insurance recommendation, believing the need to not exist or to be inconsequential.

The temptation may be to recommend the product but to gloss over the details of the definition, referring to it within the advice process in generic terms such as: ‘if you can’t perform your home duties, you will be paid’.

The definition may be studied and viewed as too restrictive to warrant any consideration. All the above actions carry with them a contingent risk. There is no denying that the various home duties TPD definitions are less than optimal.

There is also no denying that without some appropriate protection in this area, the client engaged in home duties – rendered permanently unable to continue doing them as a result of sickness or injury – may be financially ‘washed up’ and decide to take the adviser ‘to the cleaners’.

Col Fullagar is national manager, risk advice at RI Advice.