Income, asset and lifestyle protection: Drawing the distinctions

FAnews, with the help of a number of industry experts, set out to clarify the differences between the cover provided by income protection, asset protection and lifestyle protection.

Asset protection

Asset protection insurance, in the context of life insurance, provides for a lump sum payment to enable the beneficiary to settle the outstanding balance on a mortgage or other loan over an asset. It is usual for lending institutions to insist on the borrower ceding a life insurance policy covering the amount of the loan at the time the loan is granted. If the insured event occurs, the lending institution will use the proceeds of the asset protection policy to settle the outstanding debt of the insured life and pay any balance to the beneficiary of the policy.

Another form of life insurance often referred to as asset protection is insurance that protects an insured’s investment portfolio against a decline in value by more than a specified percentage at the time of their death.

Income protection

Income protection aims to replace a portion of income lost after the insured is rendered unable to work due to illness or injury. Temporary income protection replaces monthly income, typically for up to two years, but this depends on the policy and the insurer. If the insured is declared permanently disabled, the income will be replaced either as a lump sum (capital disability) or monthly (income disability) until a selected retirement age - typically age 65, although certain policies offer a choice up to age 70. The benefit is tied to the income that the insured earned before the disabling event - for example, 75% of income. However, the total benefit paid is not known beforehand, because the length of the disability is uncertain.

Lifestyle protection

The purpose of life insurance is to maintain the lifestyle of the beneficiary following the insured event. As such, all forms of life insurance can be regarded as lifestyle protection benefits. The three main events typically insured against are death, disability and critical illness or dread disease.

Lifestyle protection benefits provide protection from the financial consequences associated with the impact on a client’s lifestyle as the result of a critical illness or disability, for example, losing a limb or suffering a stroke or heart attack. A stroke could leave a client unable to perform child rearing activities, and in need of funds to hire domestic help. In a different scenario, a client may have cancer, but is still able to work. In this case, the usual disability income and death benefits – the income and asset protection benefits - would not pay out, but the client would still face additional costs to manage the illness.

The additional unforeseen expenses that would be covered by lifestyle protection include a medical aid shortfall, travel expenses for treatment, long-term care, and home renovations or even vehicle adaptions. It also includes the loss of future insurability - the ability to again find insurance in order to qualify for a future bond or personal loan.

Because there are a large number of possible illnesses, each having a different effect on a person’s lifestyle, lifestyle protection policies work on specified schedule of covered illnesses and specified severity levels that determine the benefit amount. In addition, while income protection benefits usually only cover the insured up to normal retirement age, certain lifestyle protection benefits provide cover for whole of life.