Another win for advisers

Brad Toerien

Industry research shows that 80% of South Africans cannot afford to suffer a financial setback of just R10 000. This is a shocking reality considering the excess payment required on some short-term claims is as great as this. Another thought to consider, what happens to South Africans if they are injured or critically ill and cannot go to work for a sustained period of time? The potential loss of income will most probably be much higher than R10 000.

FAnews spoke to FMI CEO Brad Toerien in an exclusive interview at the recently held 2019 Financial Planning Institute of Southern Africa (FPI) Convention where he highlighted the importance of income protection and some of the important factors to consider when purchasing this product. 

Income First

The premise of the article is that Toerien is referring to clients who have income protection in place or are seriously considering putting this cover in place. 

“An Income First philosophy is something that insurers, and advisers, should place at the heart of their business. Put simply – we would love to see more and more clients starting off their financial planning by protecting their monthly income/salary – which allows for everything in their lives – first and foremost. 

FMI often talks about how a temporary interruption to a client’s income can have permanent and long-term consequences to their finances. The statistic that only 80% of South Africans can afford to suffer a financial setback of R10 000 is frightening. However, there are other significant statistics that are present in the industry. If you look at the average South African, they are spending between 75% to 80% of every rand that they earn on servicing debt. Most South Africans are battling to make ends meet even when they are earning an income, imagine if they don’t have this security?” said Toerien.   

The key issue in the industry then becomes, how do insurers design products that can effectively protect this asset? 

Important decisions

Earning an income and having income protection in place is important for financial survival. Especially in the current economic climate. What are some of the important decisions that clients need to be aware of when purchasing income protection? 

“I think that the perfect income protection product is one that doesn’t force a client to change their lifestyle, it absolutely replaces what they are missing out on rand-for-rand and replaces it in the same way that it is earned, and that is why I strongly believe in income benefits. When a client is purchasing income protection, they need to have 100% rand for rand cover in place,” said Toerien. 

The next factor that needs to be addressed is that clients need to take the shortest waiting period possible when it comes to claims. 88% of FMI’s injury and illness claims are for less than 90 days, making short term injuries and illnesses the greatest risk an individual faces. 

“The other side of the coin is that people do not realise that they are going to live and work for longer. Longevity is a real blessing – but also a big issue when it comes to financial planning for a much longer retirement. When clients are purchasing an income protection product, they need to select a more realistic retirement age of 70 or 75 years old, so that they aren’t exposed to losing their salary during the last critical years of making an income,” said Toerien. 

Core beliefs

“Being critically ill or suffering an injury is both psychologically and financially traumatic. However, there is a theory that the more cover someone has when it comes to income protection, the less motivation there is for them to go back to work. Therefore historically; insurers haven’t allowed cover over 75% of the individuals’ total earnings. FMI strongly disagrees with this mindset, and encourages all clients/advisers to insure income is protected at 100%.” 

Toerien says, “Insurers need to believe in their client. If they are truly motivated to return to work, then they will.” This is particularly true for small business owners/ entrepreneurs, who make up a large sum of FMI’s clientele. 

Secondly, selecting shorter waiting periods allows insurers to pay more claims, and getting involved in the claims process at an early stage helps the client get the rehabilitation they need to recover and have a higher likelihood of returning to work quicker. Experts in claims teams can help clients prevent minor issues from becoming major issues. 

Lastly, knowledge about how long each claim is going to last enables companies to build this information into their assessment process and will allow for the allocation of experts to provide advice to clients and motivate them to return to work. 

Additional watchpoints

There are other watchpoints that advisers and clients need to be aware of when it comes to income protection. 

“Most clients think that they are covered for a life changing event because they are part of a company group risk scheme where they will earn a disability income. The reality is that there is typically a three to six month waiting period for the claim to be paid out, and at best, the client will be receiving 75% of their income. Another challenge is that clients believe they are sufficiently covered because they have a lump sum disability plan. The reality is, using a lump sum to provide a monthly income is incredibly difficult – especially if the funds have to stretch for an extended period of time, and, lump sum disability cover typically only pays on proof of permanence – therefore there may be months or years before the person receives anything at all,” said Toerien. 

He added that “the biggest mistake is trying to solve income needs with once-off lump sum benefits. Using income benefits to protect clients (and their families) in the case of injury, illness and death, makes risk planning far simpler for advisers – and removes a plethora of assumptions that are needed to be made when trying to calculate how much lump sum is needed. That’s why we recommend advisers to start their clients’ planning with income cover first – and use lump sums for additional costs that may arise with injury, illness or death.” 

Editor’s Thoughts:
Income protection is vital in the current economic climate. Decisions around the mix of cover and the financial planning aspect when it comes to the income once again illustrates the vital role that the adviser plays in the industry. Robo advice cannot replace this value. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.