Protecting your income

Are you prepared if you were to lose your ability to earn an income? It is not something that people like to think about. But the fact is, you have to prepare for the worst, and that includes making sure you are financially looked after in the event you cannot work.

Odetta Sekoko, a financial adviser at Liberty, says: “Our income is our greatest asset. It is therefore important to protect this income against the risk of being unable to work. Income protection will not only provide you with the peace of mind you require should you become disabled and unable to work and earn an income, it also guarantees that you maintain the quality of your lifestyle. This also allows you more time to focus on your recovery and recuperation. Basically, if you fall ill or suffer an injury that results in you being unable to work, you will still be able to provide for your family.”

What cover is available to you?

Will Keevy, head of insurance at Insurance Busters, emphasises that one of the main financial products you should have is disability cover. This will cover you in the event that you are temporally or permanently unable to work due to accidents or sickness.

However, Keevy cautions against lump sum disability cover. This type of income protection is mostly occupational disability cover, which means that in order to claim you would need to be permanently unable to perform your occupational duties. These are very hard to claim from.

David Higgins, provincial sales manager for KwaZulu Natal for Ecsponent, adds that the problem with a lump sum disability benefit is that you would have to invest this money to provide you with an income going forward. “Depending on what rates you would be able to get, your investment would actually determine your income, so there are a lot of shortfalls on that sort of investment.”

Higgins elaborates that there are some companies that will offer the choice between a lump sum pay out and a specified income at claims stage. However, the value of the payout (whether a monthly income or lump sum) will be determined at the inception of the policy.

“Another option is an income protector policy, which is basically a disability based income protection. You need to be permanently disabled and you will get the income. The duration would be determined at inception of the policy as well,” reveals Higgins.

There are also some companies that offer a sickness benefit. If you are booked off work by a doctor or unable to work for an extended time (no longer than two years), after seven days you will be able to claim for the full time you are unable to work. This type of policy will address more short term income needs.

Another product to consider is retrenchment cover. Keevy explains that this will offer protection in the event that you lose your job. This will replace your income for a set period while you look for work.

Higgins stresses that if a disability impedes your ability to work for more than two years, it is considered to be a permanent disability, and your income protection or other relevant insurance products will pay out accordingly.

What if you can still work?

What happens if you are unable to work in your primary field of occupation, but are still able to work in another industry?

Higgins points out that with most insurance companies you would need to inform them when you change your occupation. There are, however, some companies that will pay out irrespective of whether you are able to work in another field or not.

“Let’s say you were a hairdresser and you need your hand, and you lost your hand in a car accident. You could then still become a teacher for example, earning a full income, but you could have still claimed on your disability income because you are unable to do the recognised occupation that you were originally insured for,” explains Higgins.

However, Higgins notes that this type of insurance would be more expensive than some other income protection or disability cover products. There are some products that may be cheaper, but they will not pay out if you are able to do any form of work following an injury or illness, even if it is not your recognised occupation.

Why do you need income protection?

Both Keevy and Higgins agree that it is important to have income protection cover. Keevy explains: “You never know when you might get sick or in an accident and while your employer will pay your income while you have sick leave, if this runs out it leaves you in a very precarious financial position.

“In terms of retrenchment cover the current economic environment is cause for great concern regarding retrenchments. It is important to remember that retrenchment cover will have a waiting period to keep people from taking out cover just before they are retrenched or worry about the retrenchment.”

Higgins further notes that income protection forms a basic part of financial planning. “If you don’t have an income for two or three months, there’s two or three months’ of debt that needs to be paid, and that builds up, the average expenses are R10 000 to R20 000 per month. If you don’t have that, you’re immediately putting yourself under pressure. If you’re out for six months, you’re looking at up to R100 000 debt that you got yourself into straightaway if you don’t have [income protection]. That’s probably about a ten years’ worth of premiums. It’s really worthwhile. Like most insurance [products] you always think you never need them, but it’s nice to have when you do need them.”

When should you take out income protection?

Ideally from your first day of work you should be covered. However, as with most insurance products, your age and risk factor influence your monthly premiums. With income protection, while you may be a lower risk in terms of health at 25 years old, as you will have more years of unemployment ahead of you compared to some who is 45 years old, your income protection will need to pay out longer, and therefore your premiums will most likely be higher.

Higgins illustrates: “Let’s say you take [the cover] to [the age of] 65 and you’re 25. If you are disabled tomorrow, they need to pay you for the next 40 years. So the premium is going to be quite expensive at that stage, although your rating will be a little bit better than the old guy, you will still end up paying a little bit more.”

However, affordability to insurance like this may be a problem for someone just joining the job market. Higgins notes that you don’t need to insurance your full income, and a financial advisor will be able to assist in determining the extent to which you need to cover yourself based on a range of factors including affordability.

Keevy adds that by taking out income protection, will not only help you, but remove any potential financial burden to the family or friends who may have to look after you should you become disabled and unable to work and/or earn an income.

The features of a good income protection product

Sekoko points out that the objective of income protection is to ensure that you are in the same financial position after disability or impairment as you were while working. As such, there are a number of things you can look for when choosing an income protection product.

Keevy stresses that the first thing to do is make sure that you use a reliable product provider. “Secondly look for a temporary disability income protector that will not only cover you for the first two years but at least up to age 65. Make sure that the waiting period on a claim suits you. Normally a one month waiting period is more than sufficient. Make sure that you are not covered for more than your net salary.”

With regards to retrenchment cover, Keevy advises looking for a product that will cover you for at least nine months.

Higgins states that when taking out cover, you should look at:

•          The term involved: This relates to how long the policy will payout.
•          Definitions: This will look at what the policy will cover you for, such as does it cover daily living or is the policy specific to your occupation.
•          The underwriting: This will include the waiting period until you can claim from your policy. The shorter the waiting period, the higher your premiums will likely be.
•          The claims history of the insurer you are dealing with.

“The definitions are very important and that is where your financial advisor comes into it, who can compare and explain the different scenarios in terms of benefits and definitions of those products. You get some that are really cheap and some that are really expensive, but like anything in life you get what you pay for,” says Higgins.

 Handy tip: You can apply for disability cover on Justmoney.