Income protection policies pay you a regular monthly income until your selected retirement date in the event of a permanent disability. If you become temporarily disabled it will pay for the period that you are unable to work, after the expiry of the waiting period.
If you are young you might not consider disability cover, because your chances of becoming disabled are slim. You should however not forget that anyone at any age can become a victim of an accident or crime. The younger a person is the more years of your working life lies ahead. You therefore have more earnings to lose, than a person who is closer to retirement.
If you don’t have income protection cover, it might force you to draw an income from your retirement savings. This can have a drastic effect on your retirement planning. It is therefore essential to consider income protection cover regardless of your age, since it will protect your income for the rest of your working life.
Twelve things that you need to know:
- You need to be aware of the term of your income protection benefit.
People live longer, and therefore have to work longer. You need to be sure that your Income Protection cover term is until your retirement age. Most income protector policies are until age 65, however you might have to work until age 70. There are products that only cover your income for the first 24 months after becoming disabled. If this is the case, you should have an income protection policy that has a 2-year waiting period.
- Your cover amount need to keep pace with your salary and inflation.
An annual inflation increase can be selected on income protection cover amount, however It is still important to ensure that when your salary increases your income protection cover amount is also adjusted accordingly.
- Will your cover increase annually when you are claiming?
If you become permanently disabled it would be important for your income to increase with inflation. This benefit needs to be specifically selected and is called an “in claim escalation benefit”.
- There may be a waiting period.
If you have sick leave at work, a waiting period of 30 days is normally sufficient. It is important to understand that if you have a waiting period of 30 days, and you are booked off for 2 months, you would only be able to claim from the second month, for one month only. If you are a business owner, or a professional person who are self-employed, it is essential to have a 7-day waiting period.
- What happens when you recover, and are able to go back to work?
Should you recover from a disability sufficiently that you are able to return to work, the life assurer that pays you an income benefit will reassess your claim.
- For how much can you be covered?
Your income cover should be equal to your after tax income. Bonuses, commission and fringe benefits are considered to be income. If you are insured for more than your actual earnings, you might not be able to claim the full amount, since the insurance company’s do an aggregation calculation. If your income is covered at a 100% with company A, and 100% with company B, you would only have a valid claim with one of the two companies.
- Can you claim when you get retrenched, or are unemployed?
Retrenchment cover is a different product. It is important to know that when you claim, you need to proof your loss of income. If you are not employed, you cannot claim. It is important to have an emergency saving fund that is equal to 3 x your monthly salary to provide for retrenchment.
- But what if you have income protector with your group benefits cover?
Group benefits sometimes includes income protection. The cover is often applicable to permanent disability only, and sometimes include a definition of “own or similar occupation”. The cover is also not always for 100% of the income amount and can have a 3-month waiting period.
- What are the tax implications?
The contributions towards your income protection are no longer tax deductible, and therefore an income claim will not generate any tax.
- What about saving for retirement?
If you become permanently disabled you should still be able to make contributions towards your retirement savings. A disability should not ruin your retirement plan.
- What about the occupation definition?
The cover can be for your “own occupation”, or for your “own or similar” occupation. If the definition is “own or similar” you will not be able to claim if you cannot perform your regular duties, but you can still be able to perform a similar occupation. An example of the “own or similar” definition would be a consultant that drives to his clients. If he becomes disabled, and can no longer drive, but he can still work in an office, he might not have a valid claim.
- The policy will be subject to underwriting.
You will be underwritten and pre-existing conditions can be excluded, or your premium can be loaded. You can also expect an exclusion or a loading for hazardous pursuits.
Please speak to your Ultima Financial Planner if you have any questions about Income Protection.