Disability cover – three mistakes to avoid

Disability can rob you of your ability to earn an income, whether permanently or temporarily. For this reason, if you’re currently working, it’s wise to consider some form of disability cover.

However, with the vast range of options on offer, making a selection can be difficult, placing you at risk of incorrect or inadequate coverage.

We consider three mistakes that are commonly made when taking out disability cover, and provide tips to help you to avoid them.

Tip: Savings can also help prevent financial loss, should you become disabled. Kick-start a savings plan here.

1. Not knowing the difference between lump-sum cover and income protection

Lump-sum disability cover pays out a set amount if you are permanently disabled. This sum can, for example, help you modify your home and car if you are in a wheelchair, pay off your home loan, or fund your child’s education. It could also be invested to provide an income - although this would be subject to market volatility.

Income protection differs from lump-sum cover in that it provides a monthly income if you are unable to earn a living - either temporarily or permanently - due to illness or injury.

“It’s important to know the difference between these types of cover so you can manage your expectations,” says Porcha Schelhase, financial adviser at Liberty.

“For example, you may be hospitalised with kidney stones and assume your insurer will replace your income while you’re not at work. However, if you only have lump-sum disability cover, it won’t pay out for temporary disability. It only pays out if you can’t return to work permanently,” she explains.

Newer income protection and lump-sum disability products include impairment cover, or offer it as a standalone benefit. This helps if a pre-existing health condition, or a high-risk occupation, means you don’t qualify for occupational disability cover.

2. Underestimating how much disability cover you are likely to need

Policyholders routinely underestimate how much money they will need, especially if they purchase lump-sum disability cover.

According to George Kolbe, head of life insurance marketing at Momentum, most people fund their lifestyle expenses from their regular income, so income protection is a good bet, as it’s a known quantity.

“Often, a combination of lump-sum cover and income protection works best. Make sure you have enough funds to take care of your regular expenses, as well as any medical expenses – and factor in inflation, especially as healthcare costs tend to be a few percentage points above consumer price inflation,” he recommends.

A guiding principle is to get cover of six to nine months’ worth of earnings, says Mark Fleming, a financial adviser at Nexus IFP.

3. Not knowing which waiting periods apply

Consult your policy to understand which waiting periods, if any, apply to you.

“If you have income protection, and, for example, you are only off work for two weeks, but your policy stipulates a waiting period of a month, you will not be able to claim successfully,” warns Schelhase.

She adds that some occupations require a longer waiting period before a claim is allowed, so make sure you understand which these are.

Six questions to ask yourself

Having considered the common pitfalls, it’s important to ask yourself the following questions.

1. Have I based my product choice purely on cost? Lower premiums don’t guarantee a product that will meet your specific needs, says Fleming. For example, you may opt for a policy with a cut-off age of 60, 65 or 70, but what if you become disabled at a later stage?
2. Do I have an accelerated benefit? An accelerated benefit means that any life cover on your policy will be reduced by the amount of any disability claims paid. In contrast, a non-accelerated benefit means disability claims do not impact your life cover.
   For example, if you have R1M in life cover, and R500,000 in accelerated lump-sum disability cover, your life cover will be reduced to R500,000 if you claim for disability, and it is approved, at 100%.
3. Have I shared occupational changes with my insurer? You may have to revisit your income protection policy if, for example, you have received a salary increase. “Make sure your income will be adequately replaced and you won’t be left with a shortfall,” says Schelhase.
4. Have I disclosed all relevant information to my insurer? Leaving out important information that might affect coverage decisions will only harm you. Your claim may be rejected, Kolbe warns.
5. Have I read the fine print? The fine print can help you to understand what’s covered and what isn’t. “For example, your income protection probably doesn’t cover retrenchment,” notes Kolbe.
   Another clause worth noting, says Schelhase, relates to claims not being payable if you decline to undergo medical treatment recommended by your medical practitioner.
   Further, some claims may only be partially paid out, depending on the severity of your disability.
   In short, be sure to read your policy document carefully.
6. Have I consulted a financial adviser? “Disability products are complex,” says Kolbe. “It’s best to work with a certified financial adviser who can perform a needs analysis and help to determine which solution will suit you best.”

Tip: Investing for the future will remove some financial pressure if you become disabled. It’s worth considering a long-term saving strategy.