Find out how income protection insurance works
Your physical ability to earn an income is your biggest asset, yet many South Africans don’t protect their future earnings. Income protection insurance is designed to give you cover if you can’t earn an income due to serious illness or injury, and it ensures you continue to receive a regular income until you retire or are able to return to work.
Think about it – if you are not able to work for a couple of months or even years for some reason, how will you pay your bills? How would you cover your bond or rent, your car repayment, school fees and even groceries?
Traditionally, when people think about insurance, they still think about death benefits and life cover, but living benefits are becoming an increasingly important part of financial planning.
This can be seen in the trend of claim statistics in South Africa. A significantly higher proportion of claims are paid to survivors of life-changing traumatic events like serious illness or car accidents because, due to medical advancements, people can be treated and still continue to live long after they are badly injured or diagnosed with a debilitating disease. But what happens to all the bills when you are not able to work while going through treatment or rehabilitation?
An income protection plan is even more crucial if you are a self-employed professional and you don’t have sick leave to fall back on
Dr Thabani Nkwanyana, Liberty’s medical officer, says: “Cancer remains the highest cause of claims related to critical illness, death and disability. The reality of a cancer diagnosis is that the treatment and recovery after a diagnosis can take many years.
“We’re seeing more cases where the patient doesn’t die from cancer – chances are they’ll contract another condition that requires further medical care. This results in a significant financial impact on households in terms of family lifestyle, work and the ability to earn an income.”
Some life insurance companies recently released their claim statistics – Momentum paid out R89 676 742 in income protection claims last year; and, of the total claims paid by Liberty Life, 69.22% was disbursed for surviving claimants and only 30% for death claims.
The top five claim causes for Liberty Life last year were:
- Cancer: 27.9% of all claims;
- Cardiovascular disorders: 24.3% of all claims;
- Respiratory disease: 6% of all claims;
- Cerebrovascular disorders (stroke): 5.7% of all claims; and
- Renal disorders: 4.3% of all claims.
This trend is similar across the different insurers.
An income protection benefit ensures the following:
- It provides an income when you cannot work.
- It pays out a monthly income until you can start working again. Depending on the agreed upon contract, it can pay until retirement or until the end of the policy term. The income is linked to inflation.
But only your after tax income is replaced, says Gerald Mwandiambira, an award-winning certified financial planner.
- Unlike capital disability or other benefits that pay out lump sums – where you run the risk of spending all the capital and running out of money – the income protection benefit pays you a monthly “salary”.
- You can claim multiple times as long as the policy is still active.
WHO NEEDS INCOME PROTECTION INSURANCE?
Anyone earning an income can benefit from this insurance. Whether you have dependants or not, if falling ill or getting injured means you cannot pay your bills, having an income protector is essential.
Some employers offer income protection as part of group risk benefits, which offers employees a more affordable way to access income protection because the medical underwriting requirements on an individual basis are waived unless a staff member has a pre-existing condition.
Yoren Chetty, a certified financial planner at Liberty Life, says: “This enables staff who may not ordinarily obtain cover in their private capacity due to unfavourable health conditions to obtain income protection. By offering it as a benefit on the group schemes, all staff members are covered and they can choose to purchase a continuation option upon resignation, retrenchment or dismissal within 60 days from date of exit, whereby they can purchase the same income protection from their group scheme in their private capacity with limited medical underwriting – only a blood test to confirm a member’s HIV status and whether they are a smoker will be applicable.”
An income protection plan is even more crucial if you are a self-employed professional and you don’t have sick leave to fall back on.
Admittedly, income protection insurance can be expensive on an individual capacity, and one way to significantly lower your premium is to put waiting periods on the policy in place.
For example, you could get a one-month to three-month waiting period, but have a well-funded emergency reserve to fund your lifestyle during the waiting period.
The premium is, however, based on a couple of factors:
- Your qualification;
- Your age;
- Your health – if you’re a smoker, premiums will be higher, for example; and
- How much of your income you would like to replace in the event of injury or illness.
Because the terms and conditions of every insurer are different, it is always best to seek advice from your financial adviser, who can recommend the right product for your needs.
Makhu is a personal finance coach