Your client’s greatest asset is the ability to work and earn an income. The importance of protecting this asset against injury or disablement, which could render the client unable to work, cannot be overstated.
Clients rely on their income – whether a salary or income generated by a business – to provide for their family and to pay the bond, the car, the insurances and all the other expenses. If the client is injured or disabled and unable to work, his/her livelihood could be at stake. If the client is a business owner, the future of the business could be in jeopardy.
Spotting the gap
Currently, there is a large gap in the market as the majority of policyholders have chosen capital disability, which provides a lump sum benefit, over income protection, which provides a monthly benefit.
One of the main reasons for this choice is that the lump sum policies are generally cheaper than income protection.
Income protection policies are typically more expensive because they provide clients with a monthly income for the rest of their working life, regardless of how old they are when they become disabled.
Income protection therefore looks after future living expenses, should the client become incapacitated, while lump sum products are usually used for repaying debt and providing for immediate needs associated with a disability.
Lump sum considerations
Two major concerns with lump sum capital disability products is the unpredictability of inflation and investment risk.
Selecting the right amount of cover for such a policy would involve predicting future earnings and making inflation assumptions, which could leave a client either under-insured or over-insured.
People who are paid out a lump sum at the time of disability also have to adopt good financial habits. If this once-off cash payout is spent recklessly, the policyholder will be left in a dire financial position.
It is also important to understand that lump sum benefits only pay out if the client is permanently disabled, and involve a more onerous claims assessment.
Temporary disability has proven to be more common. Last year 79% of claims made against FMI’s Temporary Income Protector (TIP) product were illness related temporary disability events, lasting an average of 87 days. In all of these cases, a policyholder with a lump sum capital disability product would not have received any benefit whatsoever.
Due to temporary disability claims being of a temporary nature waiting periods are shorter and multiple claims can be made.
Temporary Income Protection (TIP) and Permanent Income Protection (PIP) product premiums are tax deductible due to their income nature.
Filling the gap
Another significant gap exists in lump sum capital disability, which income protection is designed to fill.
Income protection can be structured to pay benefits during and after the first six months following the date of claim, a period during which capital disability products generally will not pay out.
Capital Disability products generally have longer waiting periods that could worsen any financial strain already felt.
The ideal solution is to have temporary disability income cover to provide financial security in the event that the client is unable to perform the duties of his/her own occupation, and to dovetail this cover with permanent disability income cover to provide uninterrupted income protection up until a selected retirement age.
In the event of a business owner being unable to work due to illness or injury, specialised cover is available for business expenses.
Capital disability cover should not be used to replace income protection, and vice versa. Both of these covers serve a valid purpose, but cover different needs.
A mix of both products is ideal as capital disability takes care of immediate needs, while income protection offers peace of mind into the future.
Article provided by: FAnews
