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Introduction

Your greatest asset that you are ever going to own is not properties, shares, pension funds, artworks or motor vehicles, but your ability you use your knowledge, experience and training to produce an income. Unfortunately the wheel cannot be turned back if your abilities are restricted permanently restriced and you may find yourself in a position where you are going to be dependant on other people for the rest of your life to survive.

We regard income protection as the most important component in any person’s financial portfolio, followed closely by life cover, critical illness benefits, investments and any other financial products.

Types of incapacity benefits

Monthly income protection for permanent conditions:

Your earnings are “replaced” by the insurance companies subject to certain statutory restrictions until you reach a certain age (for example 55, 60 or 65). These statutory restrictions usually place a limit on the amount that can be paid out at disability (for example 75% of your stated earnings).

You can then use these monthly payouts to fund your normal financial obligations (investments, medical aid, short term insurance, et cetera) until you reach the specified retirement age and the payouts cease.

Monthly income protection for temporary conditions:

Some insurance companies also provide temporary- or sickness cover for when persons cannot do their normal job for a short period. A maximum term is usually stipulated for which these benefits will pay out.

Stand-alone lump sum disability benefit:

This benefit will pay out if you are declared disabled, subject to the compliance with the company’s definitions.

Accelerator lump sum disability benefit:

This benefit will pay out as an accelerator of your life cover (your life cover is subsequently reduced by the amount of the payout). The balance which is left will then be paid out when you eventually die.

Occupation definitions

Own occupation disability:

This benefit will pay out if you are not able to perform your specific occupation. For example, if you are a surgeon and you are declared disabled the benefit will pay out even if you have the knowledge and experience to be a lecturer at the university.

Own or similar/reasonable occupation:

This benefit will only pay out if you are not able to perform your own or any similar/reasonable occupation. If you are a surgeon with this definition the benefit will most likely not pay out if you are still able to use your knowledge and experience to be a lecturer at the university.

The premiums for “own occupation” disability benefits are more expensive than that of “own or similar/reasonable”. However, it increases your chances of having a successful claim significantly.

Premium patterns

Level:

The premiums remain the same throughout the life of the policy. A big advantage of level premiums is the security it provides a policyholder who can gauge the policy’s affordability throughout its term, knowing that the premiums will not increase in an extraordinary way.

The premiums will be higher than the actual cost of the policy at the start, but they will be lower than the actual cost during the later years. The cost of the policy is therefore levelled out across time.

Compulsory escalation:

The premiums escalate throughout the life of the policy with fixed variables (5%, 10% or CPI) per year. A big advantage of compulsory premiums is that is more affordable early in the term of the policy, but it becomes much more expensive as the policy term extends. The premiums will be lower than the actual cost of the policy at the start, but they will be higher than the actual cost during the later years.

A big disadvantage of compulsory escalation is that if the compulsory escalations are not affordable anymore, the benefits will be adjusted downwards, and insurance companies can even cancel the benefits completely.

Age rated:

The premiums escalate throughout the life of the policy based on the aged of the insured. A big advantage of age rated premiums is that is very affordable early in the term of the policy, but it becomes much more expensive as the policy term extends. The premiums will be lower than the actual cost of the policy at the start, but they will be higher than the actual cost during the later years.

A big disadvantage of compulsory escalation is that if the compulsory escalations are not affordable anymore, the benefits will be adjusted downwards, and insurance companies can even cancel the benefits completely.

Income tax implications

Monthly income protection for permanent conditions:

Premiums are deductible for income tax, and any payments when you are declared disabled are taxable.

Monthly income protection for temporary conditions:

Premiums are not deductible for income tax, and any payouts when you are declared disabled are not taxable.

Future insurability

We do not take into account any group income protection benefits that you may have with your employer becase private risk cover links to you for your entire career, irrespective of where you should work in future.

For example, if you leave your employer’s service after twenty years it might be difficult to get cover as you are much older then and may have developed health problems over the years.

Insurance companies often have stricter underwriting criteria than when you were younger and, and it can even be possible to get any cover at that stage.

If you become disabled while you still work for your current employer their group scheme and your private insurance company will apply aggregation to determine who is responsible for what benefits.

Conclusion

Our strategy with regards to income protection and disability is to always implement:

  • a monthly income protection benefit to cover the client’s full earnings, subject to a 1 month waiting period as primary priority;
  • an accelarator disability benefit of at least the same amount of life cover which is already in place as secondary priority;
  • benefits on the “own occupation” definition;
  • benefits on the level premium pattern with a maximum guarantee period (unless another premium pattern is specifically requested); and
  •  benefits that it should cease at age 65.

The information provided with this fact sheet provides a broad overview of income protection and disability benefits. However, we make recommendations and implement solutions based on an individual’s unique circumstances taking other considerations into account as well. Please contact us if you would like to assess your current portfolio to identify possible gaps that need to be addressed.