Understanding the basics of protecting your salary
Clyde Parsons, Chief Innovation Officer at BrightRock
South Africa’s high unemployment rate is scary to say the least. Job security is one of things that’s not guaranteed and it’s better to play it safe by protecting your income and not find yourself uncovered when circumstances beyond your control change your life.
Clyde Parsons, the Chief Innovation Officer at BrightRock answers questions about the importance of having income protection cover included in your life insurance policy.
1. What type of insurance should people take out to ensure they are financially secure in the event they are unable to work?
You can buy insurance for a temporary or permanent inability to earn an income due to an illness or injury. Temporary income protection always pays out a monthly income, usually for up to 24 months (but other companies like BrightRock offers temporary income protection for up to 36 months).
For permanent income protection, you will usually have a choice between cover that pays out in a lump sum (usually known as capital disability cover) or cover that pays out recurring monthly income pay-outs, but BrightRock has introduced unique disability benefits where you can choose either of these at claims stage, securing the best of both worlds.
2. Why is it important to have income protection?
Because your ability to earn an income is your biggest asset – it enables you to afford necessary assets like a home and car, childcare and healthcare. Having the right cover in place enables you to continue to afford these expenses and honour your responsibilities in the event of a debilitating injury or serious illness. And while the lump sum figures often look very big, it may not be sufficient to provide you with the income you need. It is therefore important to make sure you have enough cover to prevent any shortfalls in your expenses. Ask your financial adviser to do a thorough analysis of your needs to ensure you’ve signed up for a policy that matches it sustainably.
3. At what stage in a person’s life should they take out income protection?
Any person who is dependent on a monthly salary needs income protection until he or she reaches retirement age. Bear in mind that the total amount you require to replace all your remaining pay cheques typically reduces as you age, so you need to protect fewer and fewer salary slips over time. When you first start out in your career, the need will be at its highest because of the dependency on your income for the rest of your working life. As you start to near retirement age, your children will be likely to leave home and your debts will be paid off, and fewer pay cheques to protect, so your financial responsibilities will start reducing. And your retirement savings should kick in at retirement age to provide you with an income once you stop working, so you don’t need income protection cover once you reach retirement.
4. What are the features of a good income protection product?
A good income protection product will match your needs by offering the following features:
It tracks the value of your remaining pay cheques. Typically, this cover will start out high fairly high and increase initially to match your increasing financial needs before it starts reducing as you near retirement. Remember the Afrikaans saying, Goedkoop is duur koop – the cheapest purchases tend to be the expensive ones in the long run, because you’re often compromising on quality and comprehensiveness of cover. There are many products on the market that start off with very low cover when your financial exposure and number of pay cheques to protect are at their highest but offer more cover later in life, when you actually need less.
It will offer you certainty of the amounts it will pay out when you lodge a claim. For example, if it’s a lump sum, it should give you a guarantee regarding the income you could buy with the lump sum. Make sure you understand the claims criteria of the cover you’re signing up for. Are they subjective or objective in a sense that some of the terms might be ambiguous? Will your pay-out be reassessed in claim?
Flexibility when you claim is another important feature. Because no two individuals’ needs are the same, a good income protection product will offer you the ability to change your choice of a lump-sum to a guaranteed recurring income pay-out (or any combination of income and lump-sum) at claims stage, when you know exactly what you need. This provides you the best of both worlds – an income and a lump-sum benefit in one. The ability to change your cover as your needs change without underwriting is also vital. (BrightRock offers you the ability to convert your disability cover, anytime you no longer need it (say at age 62) to cover for a different benefit, such as life cover or dread disease cover. This should be absolutely free of medical underwriting, giving you whole of life cover those changes with your needs).
5. Under what conditions would a person be able to claim for income protection?
The conditions under which you will be able to claim, varies from policy to policy. It is important to sign up for cover that offers claims certainty. Some insurers may require proof of loss of income or proof that you can’t work, which can be subjective. Some “permanent” income protection policies will even stop your pay-outs being made when your permanent income protection claim has already been approved – this can be for a number of different reasons, including when the insurer feels you’ve recovered enough to go back to work. A good income protection provider will focus on medical or clinical criteria with an occupational underpin for added certainty:
Temporary: BrightRock requires policyholders to be booked off work with a sick note. We never require proof of loss of income. Other insurers may require proof of loss of income or may reduce your pay-out if you are earning any form of active income, while BrightRock won’t reduce your pay-out if you are able to earn an active income while you are booked off. For extra certainty, we also have a list of over 400 specific medical conditions (referred to as clinical criteria) and will pay your claim if you meet those criteria, for example on breaking a collar bone. With BrightRock you can also structure your policy to receive a payment in the event of you being retrenched.
Permanent: BrightRock requires that your condition must meet the medical conditions (clinical criteria) that are listed in your policy, for example losing a hand. If your condition isn’t on the list, or does not meet all of the criteria and still prevents you from earning an income, we also have an occupational underpin in our Job Fitness Test (own occupation) and Personal Job Fitness Test (own specific occupation). If an independent occupational therapist finds you cannot work in your job permanently because of your condition, you will also qualify for a claim. For permanent claims, we use the same criteria for recurring and lump-sum pay-outs, while some insurers have different criteria. Once we have approved a permanent claim, we will never reassess or reduce your pay-out for any reason.