What would hap­pen if you were dis­abled and could no longer work? How would you and your fam­ily sur­vive? By tak­ing out the right in­sur­ance pol­icy, you can lay those wor­ries to rest.

Finweek English Edition - - FRONT PAGE - Editorial@fin­week.co.za

manypeo­ple have health, home and car in­sur­ance, but not all of them think to worry about dis­abil­ity cover. How­ever, if a per­son loses their abil­ity to work and pro­duce their nor­mal in­come stream, this could be their big­gest fi­nan­cial risk.

Big com­pa­nies of­ten cover the dis­abil­ity risk of their em­ploy­ees, al­though many salaried earn­ers have no idea what their po­ten­tial ben­e­fits are, or if the pay­out would be suf­fi­cient. For the self-em­ployed, how­ever, hav­ing no dis­abil­ity cover could be dis­as­trous.

Dis­abil­ity in­sur­ance is cru­cial for peo­ple who have loans or mort­gages as out­stand­ing bal­ances can be pro­tected so that loved ones are not left with debt, says Gareth Fried­lan­der, head of re­search at Dis­cov­ery Life.

Its other cru­cial func­tion is to pro­tect fu­ture earn­ings, usu­ally through in­come pro­tec­tion cover, where peo­ple can choose what per­cent­age of their salaries they would like to cover – typ­i­cally 75% to 100%. This can be taken out un­til a se­lected re­tire­ment age.

“Peo­ple also opt for a lump sum as a proxy for that by cal­cu­lat­ing the present value of fu­ture in­come,” Fried­lan­der ex­plains.

Cover needs to take into ac­count the ad­di­tional costs as­so­ci­ated with dis­abil­ity. “There can be mas­sive lifestylere­lated ex­penses you are not cur­rently ex­posed to, and in­come cover is of­ten not enough to ac­com­mo­date these ex­penses,” he says.

The As­so­ci­a­tion for Sav­ings and In­vest­ment South Africa’s (Asisa’s) 2016 Life and Dis­abil­ity In­sur­ance Gap Study showed a large and grow­ing gap be­tween ex­ist­ing life and dis­abil­ity cover and the ac­tual in­sur­ance needs of earn­ers.

But, ac­cord­ing to Asisa, the costs of clos­ing the gap are rel­a­tively low, as the av­er­age earner would only need to spend an ad­di­tional 4.2% of their monthly taxed in­come to buy ad­e­quate life in­sur­ance, and 2.4% for dis­abil­ity cover. If they didn’t do that, house­holds would have to gen­er­ate an ad­di­tional R4 970 a month fol­low­ing the death of a loved one and R5 977 fol­low­ing a dis­abil­ity.

For peo­ple want­ing to take out cover, it’s a mine­field out there with dif­fer­ent prod­uct of­fer­ings – tem­po­rary and/or per­ma­nent dis­abil­ity cover and in­come pro­tec­tion poli­cies, paid over time or in a lump sum.

Gra­ham Thomas, Lib­erty Cor­po­rate chief prod­uct officer and con­venor of Asisa’s group risk stand­ing com­mit­tee, says the types of poli­cies avail­able ei­ther pro­vide a lump sum or an in­come pro­tec­tion. Lump sum pay­ments are linked to per­ma­nent im­pair­ment or dis­abil­ity whereas in­come ben­e­fit is gen­er­ally linked to a shorter-term dis­abil­ity with the pos­si­bil­ity that with treat­ment, you will or may be able to re­turn to work. Within in­come pro­tec­tion there are myr­iad op­tions.

Thomas says peo­ple need to es­tab­lish what they are cov­ered for, for how long, and whether they want the ben­e­fit to in­crease each year. If some­one de­cides on a lump sum op­tion, they need to cal­cu­late how much money they need to live with for the rest of their life.

Fried­lan­der says that for the self-em­ployed, in­come pro­tec­tion is crit­i­cal. “Of­ten cash flow is tight and missing work puts you in a com­pli­cated sit­u­a­tion. If you work in a com­pany, there is some lee­way – you have sick leave, and there won’t be an im­me­di­ate loss of in­come.” Chief prod­uct officer at Lib­erty Cor­po­rate

If some­one de­cides on a lump sum op­tion, they need to cal­cu­late how much money they need to live with for the rest of their life.

Gra­ham Thomas

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