Ways to maintain your income when you can’t work

Yet only 47% of South African consumers think they will suffer a temporarily disabling injury during their working lives.

These statistics are highlighted in the #RealityCheck Consumer Survey conducted by life assurer FMI.

The survey also shows that many people (48% of those surveyed) believe life assurers offer cover only for death; they do not realise they can get cover for the very real risk of being disabled, says FMI CEO Brad Toerien.

Given a choice on how to protect themselves, however, most people (61% of those surveyed) would prefer to cover the risk of being disabled with an ongoing income benefit rather than a one-off lump-sum cash benefit. Yet 82% of disability cover is sold with lump-sum benefits.

General advice is that lump-sum life and disability cover is most useful to cover debts such as a home loan, car loans and personal loans.

Income-protection disability cover that pays a monthly income is the best match to replace your income and should include temporary disability cover that generally pays from the time you exhaust any paid sick leave you enjoy.

Lump-sum cover will only pay out if your disability is permanent.

Using a lump sum to provide an income is problematic because it is impossible to know how much cover you need, so everyone is either over- or underinsured, says Toerien.

In addition, there is the risk that you may spend the money rather than use it to provide an income, or your investment decisions may put your income at risk.

If your benefit is a monthly income, the life assurer carries the investment risk.

Schalk Malan, CEO of BrightRock, says it is your income that allows you to afford a home, car, childcare and healthcare. Having the right cover in place enables you to continue to meet these expenses in the event of a debilitating injury or serious illness.

Wouter Fourie, a certified financial planner and director of Ascor Independent Wealth Managers, says ideally you should choose a combination of lump-sum and income benefits when you take out risk cover.

The lump sum can be used to settle debts such as your home loan if you become critically ill or disabled, while the income will cover your monthly living expenses.

However, if you are already debt-free, then an income product is the one to go for, says Fourie.

Ian Beere, a certified financial planner and MD at Netto Invest, says lump-sum benefits and income benefits both have a place.

He says it is good to leave a lump sum to settle debts, plus some as a buffer for unexpected expenses, and allocate the rest as an annuity for the benefit of those who are not good with managing their money.

However, the disadvantage of an income payment is that it may lack flexibility.

If you are disabled, for example, you may need to overspend in the short term to alter a property to cater for your disability. This may be more difficult if you are locked into an income benefit, says Beere.

He says if you choose an income benefit you need to ensure that the income you are going to receive on the death or disability
escalates by the inflation rate – and that you are not going to emigrate.

Malan says newer insurance policies provide cover that is matched to your needs and can be adapted as your needs change over time.

Because everyone’s needs are different and cannot always be predicted, a good policy should offer you the ability to change your chosen lump-sum benefit to any combination of guaranteed ongoing income and lump sum at claims stage, when you know what your needs are, he says.

Malan doesn’t agree that permanent disability lump-sum cover is best suited for lifestyle changes that arise when you are disabled.

He says lifestyle adjustment costs may arise regardless of whether you are permanently disabled or not – for example, if you have stage 1 cancer, you may have some lifestyle expenses but you won’t necessarily be regarded as permanently disabled, and will probably only qualify for a critical illness payout and not lump-sum disability cover.

Newer insurance offerings allow you to approach these lifestyle adjustment costs covered by separate benefits, he says.

BrightRock avoids using language such as “disability, death and dread disease” cover, says Malan, because we don’t always understand the differences in these cover types. Instead it offers cover for each type of financial need, such as household expenses, childcare needs, or debt, so you can determine precisely how much cover you need.

Tips to remember

Lump-sum disability cover can be taken out as an accelerated benefit on a life policy and this will cost less than stand-alone cover.

• An accelerated benefit pays out only once – so if you are disabled it will pay out then, and when you die there will either be no benefit or only the balance of the benefit.

The rationale for this is that if, for example, the benefit settles your home loan on disability, then you don’t need a benefit covering this debt when you die.

• Rebalance your insurance portfolio regularly and whenever there is an event like a new baby, a new house or a new job.

The need you have to replace your income generally reduces as you grow older and your children leave the home and become self-sufficient.

• Compare risk products between providers but understand that a cheaper premium may mean fewer benefits, exclusion clauses, different definitions of disability, different premium increases or a different term cover, to age 55 or 75 or for life.