Protecting your most important asset

The events of the past years have highlighted the importance of ensuring that your most essential asset is secured.

For those of us who have yet to reach retirement age, our most important asset is not our investment portfolios, our homes or any other physical asset – our most important asset is our ability to earn an income. While most insured individuals understand the role that life insurance and cover for dread disease and disability play in any financial plan, the role of an income protection plan is often overlooked.

What is an income protection policy?

An income protection policy is a long-term insurance policy that is designed to supplement your income when you are unable to work due to illness or injury. These policies typically continue to provide a monthly income until the insured reaches retirement age, is able to return to work or passes away.

Level of cover

While the level of income cover is usually between 50% and 75% of your monthly income, this percentage can be increased to 100% using top-up benefits in order to assist you to sustain your current lifestyle. Extended cover options can cover you up to the ages of 65 or 70, or even whole-of life.

Deferral period

An important caveat of income protection policies is that they do not start paying out the moment a claim is lodged. There is a ‘deferral period’ – a specified length of time that needs to pass prior to the policy starting to pay out. The deferral period is decided upon when the cover is taken out and can be anything from several weeks up to 12 months. The longer the deferral period specified, the more affordable the cover will be.

In deciding on the length of the deferral period, the insured needs to make sure that his/her sick leave and annual leave will be sufficient to cover all necessary monthly expenses, or that there is sufficient savings to cover any shortfall. Salaried employees are normally eligible for between 20- and 30-days sick leave in a 2 to 3 year working cycle. Once sick leave and annual leave has been exhausted, unpaid leave will follow.

If an employee is unable to perform any or all of his/her duties for a significant amount of time, the employee runs the risk of his/her employment being terminated or his/her salary being adjusted to account for the duties that he/she is no longer able to perform.

Self-employed

The risk is even higher for the self-employed or business owners as they are not able to claim sick- or annual leave. In these situations, an illness benefit (a benefit that pays out when one is booked off by a doctor) can be combined with a ‘permanent incapacity benefit’ to ensure that both short and long-term benefits are provided. Income protection policies also include cover in the event of closure of sole propriety business and partnerships.

Retrenchment

Protection against retrenchment can either be included in an income protection policy or it can be included as an add-on when you take out life insurance. Typically, retrenchment insurance pays out 75% of you monthly taxable salary for a period of up to 6 months. An insured can only claim retrenchment insurance if it can be proven that his/her retrenchment was done in line with the requirements of the Labour Act. This means that the retrenchment must be subject to specified circumstances, which include adverse business conditions, a restructuring or redundancy due to the implementation of new technology.

Taxation

While the premiums involved in income protection cover is not tax deductible, the insured will not be taxed on any pay-outs received.

Exclusions

Most policies exclude injury or illness which is self-inflicted, or which occurred as a result of illegal activity. Many insurers also exclude professional sportspeople and stay-at-home parents.

Speak to your adviser

The premiums of income protection policies are generally more expensive than that of lump-sum disability insurance products. This and the many other variables that come into play around income protection cover means that a choice regarding the type of cover needed should only be made after consultation with a qualified financial adviser.

The information contained in this article is of a general nature and intended for information purposes only. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial, legal or other issue. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner/adviser to take into account your particular investment objectives, financial situation and individual needs.