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Covid-19: income protection could be ‘best investment you ever make’

28 July 2020 Stangen

According to the recent Stanlib Savings Report 2020, Covid-19 has highlighted how unprepared South Africans are for unforeseen financial shocks – and left without a steady income flow, many have had to dip into long-term savings to fund day-to-day expenses.

Part of the reason is that South Africans tend to underestimate the value of their ability to earn an income, say Marius Botha, MD of life insurer Stangen. “Ask people what their most valuable asset is, and they’re likely to say their house, or their car. They’re wrong: their most important asset is their ability to earn an income – but few consumers actually protect this asset,” he said.

As a result, tens of thousands of South Africans find themselves unable to work due to a serious illness or injury every year, without any back-up plans. Many of these people will have traditional life insurance – but they’re insuring the wrong risk, says Botha. Statistically speaking, the biggest risk people face isn’t dying, but losing their ability to earn an income before they retire.

“If illness or injury stopped you from working for an extended period, would you be able to survive on savings or sick leave alone? Without your income, would you be able to pay everyday expenses like your bond, rent, groceries or school fees, and take care of your family and financial commitments? If the answer is ‘no’, you might want to consider income protection,” said Botha.

One of the reasons for the relatively low uptake of income protection products is simply a lack of awareness of what it is, what it does, and how it differs from other products.

What is Income Protection?
Income protection is an insurance policy designed to provide you with a replacement income if you can’t work because you’re ill or injured. It ensures you receive a regular income until you can go back to work, or retire. It’s not the same as critical illness insurance, which pays you a lump sum if you contract a specified serious illness, like cancer or heart disease.

Why do I need it?
“If illness or injury would mean you would not be able to pay your bills, you should consider income protection insurance. It’s that simple,” says Botha.

What are the various reasons for loss of income?
The reason for the loss of income determines the type of income protection policy you take out. The two most common reasons are an inability to work due to illness or injury, and retrenchment. Retrenchment cover is basically an add-on to income protection, and pays out a percentage of your after-tax income if you’re retrenched involuntarily.

What’s the difference between income protection and lump sum disability cover?
Income protection pays you a monthly amount until you retire or return to work if you are unable to work due to a long-term illness or injury. Disability cover pays out a once-off lump sum if you become totally and permanently disabled.

How long do I have to wait to claim income protection?
It depends on the terms and conditions of your policy. Generally, payments will start after you have been off work for 3 months and will be limited to 75% of your after-tax income. On confirmation of a disability, your monthly benefit will be payable until you recover, turn 65 or die, whichever comes first.

“The bottom line is that if you depend on a monthly income to meet your obligations and look after your family, you should be including income protection in your insurance portfolio. It could be the best investment you ever make,” said Botha.

Quick Polls

QUESTION

Financial behaviour experts suggest that today’s risk modelling methodologies ignore your client’s emotional ability / behavioural capacity. What are your thoughts on spicing up risk profiling tools to make allowance for your client’s financial behaviours

ANSWER

[a] Bring it on; my client’s make too many irrational financial decisions
[b] Existing risk profiling tools are adequate
[c] Risk profiling tools should be based on the model / rational client
[d] The perfect risk profiling tool is science fiction
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