The real value of disability insurance becomes evident when a crisis strikes. Unfortunately, many people view risk as something that won’t affect them and, as a result, underestimate their need for disability cover.
However, the fact remains that financial security largely depends on one’s ability to work and earn an income. If this ability is temporarily or permanently disrupted, most people lack the accumulated wealth to replace lost income – making income protection a key component of your risk portfolio.
Income protection insurance is designed to address this financial exposure, whether the disability is temporary or permanent, although bear in mind that navigating disability insurance can be complex. The main purpose of income protection is to safeguard your future earnings, and most insurers offer the flexibility to choose the percentage of your salary to cover up to 100% of your net taxable income.
Some individuals opt for multiple policies to enhance protection, yet it’s crucial to remember that income protection addresses a quantifiable loss – your income or a portion thereof. If you claim against multiple policies due to disability, the reimbursement generally caps at your gross income net of tax, regardless of policy count. While some insurers may waive aggregation, ensuring payouts irrespective of existing policies, this approach can still entail unnecessary costs and complexities during the claims process.
To qualify for an income protection benefit, you will need to be employed, possess a qualifying occupation and be medically insurable – bearing in mind that many employers provide group life and disability cover as part of their employee benefit offering thereby extending access to those who might not be able to attain cover. Moreover, group risk policies often offer continuation options, allowing for seamless coverage retention post-employment changes like resignation or retrenchment, with minimal underwriting requirements.
Securing income protection is vital for business owners and entrepreneurs. Unlike salaried employees, who have sick leave benefits, a temporary inability to earn can greatly harm business sustainability and future earnings. However, obtaining income protection can be difficult for gig economy workers, those with multiple income sources, or those engaged in unconventional jobs. Some forward-thinking insurers have addressed this issue by offering specialised income protection for high-risk occupations such as oil rig divers, as well as for students and others without current income.
Notably, income protection cover tends to be more costly than lump sum disability cover because it’s tailored to occupation-specific risks, keeping in mind that pricing considers various factors like age, gender, smoking habits, and medical history. Adding waiting periods to your policy can lower monthly premiums, although bear in mind that it’s crucial to have sufficient emergency funds to cover expenses during this period. Ideally, your income protection should adjust for inflation, ensuring your payouts maintain their purchasing power over time.
When structuring your disability cover, you may consider using income protection to safeguard your future earnings while utilising lump sum disability cover for expenses like debt repayment, retirement funding, or the costs of lifestyle modification. However, it is important to bear in mind that lump sum insurance carries risks, such as the possibility of outliving your capital if your disability doesn’t affect your life expectancy. Factors like inflation, interest rates, and investment returns also impact how long your funds will last.
It’s important to note that lump sum disability insurance only pays out for permanent disabilities, leaving temporary disabilities uncovered unless you have a separate income protection policy. In such cases, ensuring access to adequate capital becomes crucial to sustain living expenses during temporary income loss periods. Careful consideration of these factors helps align your disability cover with your financial goals and long-term security needs.
It is never easy to anticipate the additional costs that a permanent disability will generate, as this will largely depend on the nature of the illness or disability. However, when calculating your lump sum needs, it is always advisable to make provision for costs such as vehicle modification, home renovations, medical appliances and prosthetics which may not be covered by your medical aid, ongoing rehabilitation and treatment, travelling expenses, and alternative therapies.
It’s crucial to review your disability cover annually to ensure it aligns with your current life stage and needs. Mitigating disability risks typically involves a blend of insurance and invested assets to maintain financial independence in case of unexpected events. Some innovative insurers allow policyholders to adjust the balance between income protection and lump sum benefits as their life circumstances change, often without requiring additional medical underwriting. Also worth noting is that, as your wealth grows, your reliance on disability cover may diminish as you accumulate resources to cover future living expenses independently.
Regardless of your situation, take the opportunity to thoroughly evaluate your disability protection’s role within your overall financial strategy. This proactive approach will ensure that your insurance remains effective in safeguarding your financial well-being over the long term.
