Many people 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 the 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 lifestyle-related 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 overtime or in a lump sum.
Graham Thomas, Liberty Corporate chief product officer and convener of Asisa’s group risk standing committee, says the types of policies available either provide a lump sum or 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.”
Advice from the experts
Unexpected deaths and disabilities are, unfortunately, fairly common, says Gareth Friedlander, head of research at Discovery Life.
“We tend to think this won’t happen to us, but it happens to clients of every age – 46% of our income protection claims were from clients younger than 40 and in the lump sum space more than a quarter.”
Younger people are worse affected, says Friedlander. “They haven’t been able to build a buffer, they haven’t really begun their earnings journey, so they must think about it and protect against it.”
Friedlander points out that younger people will readily insure their homes, computers and mobiles. But “without exception, your biggest asset is your future income. This must be your first thought when you look at what to insure and how you budget,” he says.
Insurance that covers your death is aimed at looking after the people left behind explains Liberty Corporate’s Graham Thomas, but disability cover has to look after you too.
For adequate disability cover, you need to cover the requirements of the people who depend on you as well as yourself and the additional expenses like medical treatment and specialist disability needs that come with disability.
Momentum’s 2016 claims stats show that the major causes of lump sum claims are musculoskeletal (21%), nervous system (15%), cancer (10%), psychiatric or mental (8%) and cardiovascular (7%).
Major causes of disability claims are musculoskeletal (28%), fractures and hospitalisation (9%), surgery (8%) and cancer (8%). Over 60% of disability claims are made by men.
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