By Ryno Crous
Income Protection forms part of a long-term insurance policy and is designed to pay an income to the life assured in certain instances where you are unable to work for an extended period of time, as a result of illness or disablement. The payment-term will depend on the options you choose to attach to the benefit, and claim payments can be made until retirement, recovery, or death.
You have the choice of either temporary and/or extended income protection benefits. With most insurers, temporary income protection relates to an initial claim period lasting up to a maximum of two years, and the extended variant will then start paying if the disability is deemed to be permanent i.e. the life assured remains incapacitated after two years and will continue to provide an income until recovery, retirement or death, depending on the option chosen.
The maximum amount of cover that an individual can qualify for is their after-tax salary. That said, claim payments are completely free of tax. The cover amount can be further adjusted by adding options that allow for in-claim escalations such as, but not limited to, inflation-linked increases – this option has the effect of increasing your claim payments in line with inflation on annual basis.
It is important to note that income protection benefits do not pay out immediately after a claim has been approved, as certain waiting periods may apply to the policy. These can be 7 days, 1 month or 3 months before the first claim payment is made. You will have a choice of selecting a waiting period at inception of your policy, and generally shorter periods are concurrent with more expensive premiums. However, most salaried employees are afforded a maximum of 30 days paid sick leave in a 3-year cycle, so the appropriate waiting period would largely depend on individual circumstances.
MISCONCEPTIONS ABOUT INCOME PROTECTION & RELATED BENEFITS
- Income Protection vs. Unemployment Insurance:
Income Protection benefits are frequently confused with unemployment insurance products such as retrenchment cover. However, the latter is a completely separate benefit that functions differently compared to income protection, in that this product is governed by its own set of terms and conditions, according to the definition of “retrenchment”.
The purpose of income protection cover is to replace or supplement income that is lost due to the inability to perform the duties required by one’s occupation as a result of an illness or injury occurring that falls within the scope of a claimable event, as determined by your insurer. It is therefore clear that these benefits do not offer cover in the event of unemployment caused by operational constraints.
- Income Protection vs. Lump-Sum Disability Insurance:
Some employers offer lump-sum disability cover as part of their employee-benefits scheme. This often creates a misconception among members of the said scheme, in that they are sufficiently covered in the event of disability, and do not require further income protection benefits. In most cases lump-sum disability cover (provided by employee benefit schemes or private insurers) only pay out in the event of permanent disability. If your disability is deemed temporary i.e. there is a prospect of recovery within a two-year period or less, the cover will not pay out, possibly leaving you financially destitute until you are able to resume working.
Secondly, the amount of lump-sum cover that would be required to sustain an individual’s after-tax salary up until retirement/death, including inflationary increases, would be vast. For instance, a 30-year old client earning an after-tax salary of R 28 000.00 per month, would need an approximate amount of R 8 942 920.00 in lump-sum disability cover in order to replace his/her salary (including annual inflationary increases) until retirement. Since the cover amount provided in the context of an employee benefit scheme is normally calculated using a multiple of annual salary, it is unlikely that this amount alone will ever be enough to cater to the risk of permanent disability. Lump-sum disability cover provided by a private long-term insurer to replace your salary up until retirement/death will most likely result in expensive premiums.
In 2019, 38.12% of claims paid by Liberty for clients under the age of 35 was due to loss of income and 30% of these claims resulted from applicants becoming disabled or contracting musculoskeletal diseases and disorders.
Your greatest asset is your ability to earn an income, and the risk of losing this income is a very real possibility among clients of all age-groups and genders. Your financial goals and prospects of reaching them are dependent on your continued ability to earn an income and generate cashflow. Without the necessary cover in place, an event leading to your incapacity and inability to generate an income, can be devastating and will derail your goals and plans for a financially prosperous future.
Please speak to your financial advisor if you need assistance in this regard or wish to review your current position in terms of income protection cover.