Income protection: Providing a salary when you are unable to earn

Many people tend to over-estimate the need for life and capital disability cover but underestimate the need for income protection. If you’re earning an income – whether through formal employment, running your own business, or as a freelance contractor – it is important to understand the impact on your financial plan should you lose all or part of that income as a result of illness or injury. The bottom line is that income protection is crucial for anyone who depends on their monthly income to cover their living costs and save for retirement.

In a nutshell, income protection is a long-term insurance policy designed to replace or supplement your income in the event of illness or injury which temporarily or permanently prevents you from earning an income. While you may not perceive this to be a risk, bear in mind that the risk of a temporary illness or injury is much greater than the risk of dying, becoming disabled or contracting a dread disease. Importantly, keep in mind that an income protection benefit is not designed to pay out in the event of retrenchment.

The premise of an income protection benefit is that it is designed to ensure you can maintain your standard of living and that you can at the same time save towards your retirement , keeping in mind that most income protectors end at age 65, although some insurers allow you to purchase cover up to age 70, 75 or even ‘whole of life’ in some instances – for which you would naturally pay a higher premium.

The income protection landscape is permanently evolving and, operating in a highly competitive insurance market, the benefits are constantly being enhanced and upgraded. Income protection benefits vary from insurer to insurer, making it almost impossible to make like-for-like comparisons. Being a highly technical area of insurance, choosing an income protector is best undertaken together with an experience, independent adviser who will help you determine the correct quantum of cover, the right waiting period for your needs and the most suitable policy termination age. Many insurers offer top-up benefits, benefit enhancers, health premium waivers and even maternity income protection, and your adviser should be able to guide you through these options.

When taking out an income protection policy, you will need to give careful thought as to the level of salary you wish to protect. When determining this, give consideration to your monthly living expenses, bond and vehicle repayments, as well as how much you would need to put away each month to fund for your retirement, keeping in mind that you will need to begin drawing down from your retirement capital at the termination date of your policy. Most insurers allow you to choose a level of income ranging between 50% and 100%, capped at 100% of your net, cost-to-company salary, depending on your specific circumstances and needs. If your claim is approved, the income protection benefit will continue paying until you recover, when the policy terminates, or upon death, whichever happens first.

Most policies come with options regarding waiting periods, which is the period that needs to pass before you can claim from your policy. Waiting periods can range from 7 days, 1 month, 3 months or 6 months, depending on your occupation and your financial needs. If you are comfortable that you have sufficient savings to self-fund a 3-month waiting period, then this could be an option, bearing in mind that the longer the waiting period, the more cost-effective your premium will be. Alternatively, if you are formally employed, you may be comfortable that you have sufficient sick leave available to see you through your nominated waiting period. On the other hand, if you are self-employed or a business owner, you may not have the luxury of taking sick leave, which means you may want to consider opting for a shorter waiting period.

From a tax perspective, while the contributions paid towards your income protection policy are no longer a tax-deductible expense, the income paid from your policy should you qualify for a claim are free from tax.

According to a leading long term insurance company in South Africa, you are nine times more likely to have a temporary disability than to have your car stolen or be hijacked in South Africa, and 70% of people will experience at least one injury or illness during their working lives that will prevent them from earning an income.  As such, it is important to ensure that your policy includes both a temporary and permanent disability option. A temporary income protect provides a monthly payout for between 0 and 24 months in the event that you suffer from a temporary disability and will cease as soon as you recover. In addition to temporary disability, you may want to also ensure that your policy covers you for partial disability where you are able to perform some, but not all, of your normal duties.

When taking out your policy, it is also vital that you know to what extent you are covered as there are a number of types of disability cover, and understanding the criteria for assessment can be complex. Traditional disability assurance is based on whether or not you are physically able to work. Depending on the nature of your employment, you may want to consider disability cover based on your occupation. ‘Own occupation’ cover will pay out if you can no longer perform the nominated profession or job title on the policy, and this cover normally applies to professionals. ‘Own or similar occupation’ covers you if you can no longer perform your current or similar job that you could reasonably be expected to do. Finally, ‘any occupation’ provides cover if you are unable to perform any job at all. If you are disabled but can still perform some other job, albeit a menial one, you will not qualify for a claim.

Some insurers have recognised the recent growth in the gig economy and have introduced income protection benefits that provide cover for the income earned from one or more side hustles, provided that the side hustle makes up a minimum percentage of your overall income. Gig workers, contract workers and independent workers, having historically been excluded from income protection cover, now qualify for income protection that covers a wide range of occupations and multiple income streams, with the exception of those who engage in particularly dangerous professions such as working at heights, underground or with explosives.

When it comes to exclusions, most policies exclude injury or illness which is self-inflicted, or which occurred as a result of an illegal activity. Many insurers also exclude professional sports people, jockeys and stay-at-home parents.

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