Beware the “double whammy” risk in disability

"People forget that disability does not result only from car accidents, high-risk activities or jobs that involve heavy manual work,” says Ferdi Booysen, GREENLIGHT Product Manager at Old Mutual. "A stroke, for example, can incapacitate someone who does nothing more strenuous than sit at a desk all day.”

Breadwinners tend to be more concerned about dying at an early age than about being unable to work – and your clients are no exception. They tend to be unaware of the risks associated with, underestimate the severity of and remain underinsured for disability events.

The following statistics from the United States are quite telling: If you are younger than 35, there is a 30% chance that you will be disabled for at least six months during your career. Men have a 43% chance, and women a 54% chance, of becoming seriously disabled during their working life.

"A client who does not have disability cover is exposed to the ‘double whammy’ risk of losing their earnings as well as incurring huge hospitalisation and rehabilitation costs. Together these can devastate a family’s finances,” says Booysen. It can take many years for your client’s family to recover financially from such an event.

Imagine, for example, if your client had been saving for a child’s university education, but had to use that money for renovations to accommodate a disability instead. The financial consequence of not insuring one’s income against disability passes to the next generation.

The financial risk compounds due to the fact people are living longer than before. Science Daily reports that some scientists believe most children born after 2000 will live to be 100 years old. If current savings patterns are maintained many people will outlive their retirement savings and be unable to meet the cost of special care in their final years.

A Canadian study found that 22% of people older than 65 need frail care and that the need rose to 43% for people aged 85 and older. The cost of frail-care homes varies from R6050 to R9400 per month.

The abovementioned statistics pose serious problems for a nation that is already underinsured for both death and disability cover. A study commissioned by the Association for Savings and Investments SA (ASISA) in 2010 found that the Disability Insurance Gap had grown from 49% in 2007 to 60% in 2010. In 2010 only 40% of insured South Africans’ need for death or disability cover was met .

Several reasons have been cited for this: Customers Clients do not have their risk cover needs assessed, cannot afford all the cover they need, or are not aware that their current lump sum cover will only provide an income for 10 years instead of the 20 years to retirement.

"It is really important for your clients to have disability cover until their retirement cover can take over,” notes Booysen. "If your client intends to retire retiring at age 65, theyhe / she will need disability cover for 100% of their income up until that age.”

Thousands of South Africans risk financial hardship because they are underinsured. Fortunately, good disability cover has a number of benefits. It can help keep your clients’ retirement planning on track by replacing 100% of their income while they are incapacitated. The premiums on income disability benefits are also tax deductible.

What can financial advisers do to close the gap? "New generation disability products enable you to cover 100% of your clients’ income for temporary as well as permanent disability, until a retirement age of up to 70,” concludes Booysen. "You should inform your clients of the pressing need for disability cover and avail of the myriad products and benefit structures to ensure that they avoid financial calamity during their income-generating years.”