Protecting your income, securing your future: Why disability cover matters

Disability insurance

Many people approach risk as something that will never happen to them and, as a result, underestimate their need for disability protection. If the process of generating an income is temporarily interrupted or permanently stalled, most economically active people would have insufficient assets to replace the lost income, making disability insurance an imperative for most.

Generally speaking, disability cover can either take the form of lump sum disability cover (also known as capital disability) or income protection which is designed to replace lost income. In many instances, it makes sense to have a combination of both capital disability and income protection, although this will largely depend on your personal circumstances. When calculating the level of insurance needed, it’s important to consider your financial position, and that of your loved ones, should you suffer from temporary or permanent disability. Finding a balance between capital disability and income protection cover involves a careful analysis of your earnings, your dependants, lifestyle expenses, debt and your current level of retirement funding, amongst other factors.

With the primary function of income protection being to protect your future earnings, most insurers allow you to select the percentage of salary you would like to insure, up to 100% of net of tax earning s– keeping in mind that this type of cover is designed to protect against a quantifiable loss. As such, in order to qualify for this type of insurance, you will need to be employed, have a qualifying occupation and be medically insurable – although it is important to keep in mind that some occupations are considered too high-risk or unorthodox to insure.

While income protection cover is generally more expensive than capital disability cover, it is important to remember that this type of cover is occupation-based and is priced according to the risk that an individual presents to an insurer. It also considers other factors such as your age, gender, smoking status, and medical underwriting. You can elect to include waiting periods on your policy which can also serve to reduce your monthly premium, although it is then important to ensure that you have sufficient emergency funding in place to tide you over during the waiting period. Ideally, your income protection benefit should be linked to inflation to ensure that the value of your monthly payout keeps pace with the cost of living and does not lose its purchasing power over time.

If you are formally employed and enjoy group benefits, it is likely that your group cover includes an income protection benefit. The advantage of group life cover is that it makes long-term insurance cover accessible and available to those who may otherwise not be able to obtain cover in their personal capacities. Further, many group life policies include a continuation option which allows you to purchase the same level of cover with limited underwriting in the event of resignation, retrenchment or dismissal.

For business owners and entrepreneurs, securing an income protection benefit will be an imperative because, without sick leave to fall back on, even a temporary inability to generate an income can have a catastrophic effect on your business and future profitability. Having said that, many business owners – specifically those who operate in the gig economy, have multiple streams of income or engage in unorthodox occupations – struggle to obtain income protection, although a handful of insurers have taken bold steps to provide income protection benefits to those with high-risk occupations, such as oil rig divers, as well as to those not yet earning an income, such as students.

In the event that you do not qualify for an income protection benefit you can elect to insure yourself through a capital disability benefit. Alternatively, you may elect to protect your future income, or a portion thereof, using an income protection benefit while using capital disability to fund other expenses such as debt, retirement or lifestyle modification costs. For instance, you may want to take out lump sum cover that would be sufficient to pay off your home loan and provide for an income during your retirement years, meaning you will need to calculate the amount of money you need to live on for the rest of your life and then capitalise that amount in the form of a capital amount.

That said, keep in mind that capital disability cover is by no means a panacea for all types of disabilities, especially in circumstances where your permanent disability has no bearing on your life expectancy which could raise the risk of you outliving your capital. Further, variables such as inflation, interest rates and investment returns can also affect how long your capital will last, and careful planning is strongly advised. Worth noting is that capital disability cover only pays out in the event of a permanent disability and could leave you somewhat at risk in the absence of adequate income protection cover.

When contemplating your disability cover requirements, it is advisable to factor in other potential costs that may arise as a result of a disability such as home and vehicle modifications, renovations, medical appliances and prosthetics, rehabilitation, travelling expenses and alternative therapies not covered by medical aid. Most importantly, ensure that you revisit your disability cover at least annually to ensure that it remains appropriate to your needs and that you do not end up paying for cover that you no longer need.

As is evident from the above, protecting against the risk of temporary or permanent disability involves using a combination of risk cover and invested wealth to ensure that you remain financially secure for the remainder of your life and through the various life stages. Understanding the realities of life-stage financial planning, some insurers now make it possible for policyholders to select a mix of income protection and capital disability cover as they move through the various stages of life without the need for further medical underwriting.

Finally, keep in mind that as you accumulate more wealth, you may find that your need for disability cover reduces in line with your ability to self-fund your future costs of living – and changes to your income, health status and lifestyle may necessitate that your cover is re-assessed and re-aligned to your needs. As such, ensure that a review of your disability cover forms part of your annual financial planning review process.

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