The real value of disability insurance often only becomes apparent when crisis strikes. Unfortunately, many people underestimate their need for cover, assuming that disability is something that will never happen to them. Yet, for most economically active individuals, the security of their financial future is directly tied to their ability to earn an income. If that ability is disrupted or permanently lost, very few would have sufficient savings to sustain themselves.
Disability insurance typically takes one of two forms: lump sum disability cover (also known as capital disability) or income protection. In many cases, a combination of both is advisable, depending on your personal circumstances. When assessing your cover needs, consider the impact that losing your income would have on you and your loved ones’ financial position. Your income funds everyday living expenses, debt repayments, medium-term savings, and long-term goals such as retirement, education, or supporting dependants. Your level of disability cover should reflect your financial obligations and life stage.
Income protection benefits are designed to cover a percentage of your salary—usually up to 100% of your net taxable income. Some people consider multiple policies for added protection, but keep in mind that income protection is intended to cover actual financial loss. Insurers generally limit payouts to your total net income, regardless of how many policies you hold. A few insurers do not aggregate across policies, but this may still create risk at claims stage and lead to paying for unnecessary cover.
The suitability of income protection depends heavily on your occupation. For example, a surgeon who loses the use of a hand may no longer be able to work, whereas a salesperson could continue working. Conversely, a footballer with a foot injury may be unable to earn a living, while a surgeon might still be able to operate.
To qualify for income protection, you must be employed, have a recognised occupation, and be medically insurable. Many formally employed individuals benefit from group cover through their employer. Group life policies often include income protection and can be especially helpful for those who might struggle to obtain cover personally. Many group policies include a continuation option, allowing you to maintain cover after leaving employment, with limited underwriting.
Business owners and entrepreneurs, who lack the safety net of paid sick leave, face significant risk if their ability to earn an income is compromised. Even a temporary interruption can be financially devastating. Many self-employed individuals—particularly those with multiple income streams or unconventional roles—have historically found it difficult to access income protection. Encouragingly, this landscape is evolving. An increasing number of South African insurers now offer tailored income protection solutions for freelancers, students, and those in high-risk occupations such as oil rig divers.
Income protection is generally more expensive than lump sum disability cover, as it is occupation-specific and priced according to your individual risk profile. Premiums also take into account your age, gender, smoking status, and health. You can reduce premiums by including a waiting period, although this means you’ll need adequate emergency funds to cover expenses during that time. Ideally, your benefit should be inflation-linked so that your payouts keep pace with the cost of living over time.
If you do not qualify for income protection or want to bolster your cover, lump sum disability insurance may be a suitable alternative. You can also use a combination of both: income protection to secure ongoing earnings and lump sum cover for expenses like debt settlement or lifestyle changes. For example, you may choose to cover your home loan and capitalise your retirement income using lump sum cover. However, lump sum benefits come with limitations. If your disability doesn’t affect your life expectancy, you run the risk of outliving your capital. Market conditions such as inflation, interest rates, and investment returns can further impact how long your capital lasts. Lump sum cover generally only pays out for permanent disability and offers no protection for temporary income loss, which means you need to ensure liquidity to cover short-term living costs.
It’s difficult to anticipate the full financial impact of a permanent disability, as costs depend on the condition. When calculating your lump sum needs, account for possible expenses such as vehicle and home modifications, mobility aids and prosthetics, ongoing rehabilitation, alternative treatments, and out-of-pocket healthcare costs not covered by medical aid.
It is essential to review your disability cover annually to ensure it remains appropriate for your evolving financial and personal circumstances. A robust strategy typically involves a blend of insurance and personal investments to maintain long-term financial independence. Encouragingly, leading insurers in South Africa have embraced a modular approach, allowing policyholders to adjust the ratio of income protection and lump sum cover as their needs change—without requiring further medical underwriting. This flexibility helps ensure that your cover remains relevant throughout your life.
Disability insurance is not just a policy – it’s a critical safeguard against life’s uncertainties. As your career and lifestyle evolve, so too should your protection strategy. Take the time to understand your cover, reassess it regularly, and ensure it aligns with your long-term financial goals. Whether through income protection, lump sum cover, or a combination of both, make informed decisions now so that you and your loved ones remain financially secure, regardless of what the future holds.
Have a wonderful day.
Sue
