We all know how unpredictable the future can be, yet most South Africans are underinsured in respect of disability cover. Recent research indicates that most people do not think that they will encounter a disability event in their lifetime, yet records indicate that about 70% of people will have at least one disability event in their working careers that will prevent them from earning an income on either a temporary or a permanent basis.
You may then be asking whether disability insurance is worth it. Let’s have a look at it in context.
Consider that many people insure their big value items like their car and their house, mainly because should the worst happen, the replacement costs are so high. Knowing this, would you want to insure an asset that is arguably worth several times more than your car, home and everything else you own combined? If your answer is yes, then disability insurance is worth it.
It is far too easy to overlook your income as an asset because it isn’t tangible like a car or home, but your lifetime income potential is the most valuable thing you own. Think about the number of years you plan to work then multiply that by your annual salary. That’s a pretty big number, even before factoring in raises, promotions or job changes. Of course, the math adds up so long nothing goes wrong, but that doesn’t always happen.
That’s exactly what disability insurance is for. It replaces a chunk of income you would have lost because an injury or illness prevented you from working. Big picture: It will help your financial plan stay on target, even if you temporarily get knocked off course.
Speak to your financial advisor about your financial planning needs. You will notice that disability insurance forms a foundational piece of a financial plan, which means disability insurance is absolutely worth it. Given that, here’s what you should know about.
HOW DO I GET DISABILITY INSURANCE?
Good news: If you work full time, there’s a good chance your employer already provides some level of group disability insurance cover. Most retirement funds include risk benefit insurance. These risk benefits may include disability cover and critical illness cover. This cover may not cover your full needs. The risk benefit payments will be structured to be either taxed or tax free. Provide your group risk cover details to your financial advisor to ensure a comprehensive needs-based plan, including the most appropriate and cost effective disability cover solution for your needs.
CAN I GET MORE THAN WHAT MY EMPLOYER PROVIDES?
Absolutely. You can supplement your group risk cover with a private disability insurance. Or if you don’t have risk cover through your employer, you should get private disability insurance cover. A private plan also allows you to take your risk cover with you throughout your working life. If you leave an employer, you typically lose your disability risk cover that was provided through the job.
OK, WHAT FORMS OF DISABILITY INSURANCE ARE AVAILABLE?
Disability insurance generally takes the form of either an income protection benefit or a lump sum benefit.
Income protection is essentially a salary protection plan. Should you become temporarily or permanently disabled, this cover will provide you with between 75% and 100% of your taxable income. If you are temporarily disabled, your cover will continue for a limited period of time, typically for a period of two years. In the case of permanent disability, your cover will continue up to your nominated retirement age. It is important to ensure that your cover is linked to CPI so that your monthly pay out does not lose value over time in real terms.
In the event that you are permanently disabled, a lump sum disability cover provides a single capital pay out which can be used to settle home loans or debt. It can also provide much-needed financial assistance in respect of lifestyle adjustments, home renovations and vehicle modifications that may need to be made. If income protection cover is not available to you for whatever reason, lump sum disability cover can also be used to provide an income.
Your financial advisor will be able to assist you with calculating the correct level of cover.
HOW MUCH DO I NEED?
There’s no hard-and-fast rule about how much disability insurance you need. But it’s typically a good idea to get enough to replace as much of your income as possible. To go back to the initial comparison, what if your house burned down? Would you want a policy that paid you for 50 to 60 percent of the cost to replace it? Or would you want a policy that paid to replace your whole house?
Due to the number and complexity of disability insurance options available in the market, speak to a financial advisor who has the tools and training to help you arrive at a solution that matches your goals. He or she can show you how all the pieces of your financial life, including disability insurance, fit together.