You have worked hard to attain a certain lifestyle, and yet your ability to earn an income remains your most valuable asset.
Younger people, in particular, are at high risk of falling victim to an accident. Data from the Road Accident Fund shows that the highest percentage of road fatalities occurs among drivers between the ages of 20 and 35. This is typically the age group that is still in the process of accumulating a sizeable nest-egg to cover the proverbial rainy day.
It is vitally important that you insure your income earning ability against illness or disability, particularly if you are self-employed.
Income protection products offer cover in the event of temporary or permanent loss of income, due to illness or injury, from your regular occupation. Benefits are paid monthly in arrears. This differs from lump sum disability cover that only pays out on permanent disability.
Each has its merits, although income replacement benefits seem to be growing in popularity over lump sum benefits.
Some of the benefits of income replacement products include the following:
- The amount of cover can be closely matched to the exact income needs. By reviewing and updating the cover on a regular basis you can ensure that the benefit payments keep pace with your normal income increases. In turn, these payments are guaranteed to your normal retirement age (or other age selected). You can also select to have the payments keep pace with inflation. When it comes to lump sum benefits, the responsibility lies with you to ensure that the payout is invested optimally and that the money lasts for the duration of your life.
- Temporary disability is automatically covered. As stated above, a key advantage of income replacement benefits is that they pay out on both temporary and permanent disability. An extended period of temporary disability (in the case where you have only lump sum cover) could result in financial hardship.
- There are significant tax advantages. Income replacement benefit premiums are tax deductible, but this is not the case for lump sum disability cover. You will, however, pay tax on the proceeds of their income replacement benefit, whereas the lump sum disability benefit payment is not taxable.
It’s important to note that most disabilities are of a temporary nature, in which case a lump sum disability benefit would not provide cover. As an example, the bulk of claims received by insurers for the income protection benefit are for periods of three months and less.
The first step is to decide on income replacement versus lump sum cover, or a combination of both.
The next decision that can have a major financial impact is to decide on the waiting period.
Income replacement is an investment in your future security, as well as that of your family. As such, it is a vital part of any personal financial plan.
Anne-Marie Gous is Business Development Manager at Glacier by Sanlam.