Retrenchment cover can keep you afloat

In challenging economic times, companies tend to reduce costs or spending by making employees redundant. Nedgroup’s November 2022 Pulse Report indicates that hiring freezes and layoffs became more common in 2022, with South African CEOs planning to cut costs in anticipation of a possible recession.

If you’re faced with an abrupt loss of income, retrenchment cover can keep you afloat while you search for a new job or start a small business.

We investigate what this kind of cover entails, and how to ensure you’ll have enough money to tide you over if you lose your job through no fault of your own.

Tip: Investing in unit trusts can help you to save for a rainy day, at inflation-beating rates.

Who needs retrenchment cover? 

Our ability to earn an income is our biggest asset, says Porcha Schelhase, a financial adviser at Liberty Group.

“If you are a single person, single parent or breadwinner, it would be wise to take out retrenchment cover to protect your income and lifestyle should you be made redundant and forced to find a new job.”

This would be less critical, Schelhase points out, if you have a partner who can financially sustain the household while you go job hunting; or if you have three to six months’ worth of salary saved up.

Gcina Betela, chief financial officer at Absa Life, says understanding your risks will help you to assess whether you need cover or not.

“Work out which risks are most detrimental to your financial position,” he says. “How would it impact your finances if you couldn’t earn for six to 12 months?”

Who qualifies for cover? 

You can claim against retrenchment cover if you have lost your income due to redundancy, says Betela, who adds that Absa’s option will cover you for six to 12 months for all employment forms.

However, there is significant variation in the industry, and some insurers only allow a claim once you have lost a full-time position. Betela recommends that you shop around before making a purchase. 

In order to qualify for cover at Absa, you must be either:

• Permanently employed,
• On a fixed-term contract, or
• In a temporary arrangement with a company.

If you’re not employed full-time and have an irregular income, an average of your earnings over time is calculated.               

Betela notes that Absa’s retrenchment cover is offered in two ways: 

• On its own, when you add retrenchment cover to a standard life insurance policy. What the insurer pays is related to what you earned before retrenchment; or
• Linked to your credit facility, through credit life insurance. This will generally pay up to 12 instalments should you be retrenched. It also covers loss of income, and usually covers more types of employment than would be covered on a standard life policy.

Betela cautions that while disability income protection is not dissimilar from retrenchment protection, you are less likely to become disabled than you are to be retrenched.

What does retrenchment cover cost?

According to Betela, pricing depends on a few factors. 

“Unfortunately, you can’t get standalone retrenchment cover. If your bank or credit provider requires credit life insurance, you will be covered for retrenchment, death, and disability. The maximum they can charge for this is R4.50 per thousand rand borrowed or owing,” he says.

Schelhase says the cost is calculated on the life assured’s rating details, including age, income, smoker status, education and occupation.

Will the Retrenchment cover policy pay out enough?

Betela says if you have retrenchment cover linked to a life policy, you will receive the income you stipulated when you took out the policy. Your policy will indicate how much you’re covered for – but you need to know how much income you can live on at policy inception.

If you have a credit life policy, your credit facility’s monthly instalment will be paid by the policy for up to 12 months.

Schelhase recommends you familiarise yourself with your cover's terms and conditions to make sure you qualify for a pay-out.

“Retrenchment cover has set criteria. It’s imperative that you understand and meet the claim criteria to avoid disappointment,” she says.

Typical criteria include:

• Qualifying for a claim six months after you took out the policy, provided you have been permanently employed for at least two years and employed by your current employer for at least one year.
• Submitting a claim having been unemployed for an entire month after being retrenched.

You will be protected for up to six months, but you must be registered for UIF to claim under this benefit.

“Make sure you read your policy document carefully to find out if any specific exclusions may apply,” says Schelhase.

Saving is imperative

Schelhase cautions that building up savings is imperative to avoid falling into financial disarray in the event of retrenchment.

“Typically, everyone should have at least three times their monthly income saved up for an emergency,” she concludes.

Tip: Debt consolidation can lower your repayment amounts. Find out how to obtain relief.