16 Jun Disability insurance pointers
This article first appeared in the press on 16 June 2009.
Disability insurance cover protects your most valuable asset – your ability to earn over an extended period of time.
If this ability is curtailed, either through disability or through impairment, you may need to ensure that you have cover to meet your financial requirements. This does not only apply if you have dependants. It is as important if you have no dependants, as this enables you to remain financially independent of others, thereby maintaining your dignity.
It is necessary to distinguish between impairment and disability. Impairment implies a physical or functional disorder, but does not stop us earning an income. Your ability to earn may be impaired, but not completely stopped. Examples of impairment may be the loss of a limb or the loss of eyesight. Disability, on the other hand, implies an inability to earn an income.
The modern disability insurance cover often incorporates both disability and impairment cover. If you are impaired, you would receive a percentage of the insured amount. This information is included in the details of the policy and outlines the percentage payable per impairment and usually increases with the severity of the impairment.
Drilling down further
There are three forms of disability insurance cover, namely Own Occupation Disability , Occupational Disability and Total Disability.
- With Own Occupation Disability, you are covered if you are unable to perform your current nominated occupation.
- If you have Occupational Disability, you would be covered if you were unable to perform your nominated occupation or a similar occupation. To illustrate by means of an example, if you were a heart surgeon, and you lost a hand, with Own Occupation Disability you would be fully covered and paid out, as you can no longer operate. Under Occupational Disability, you would not be paid out, because you could become a General Practitioner. Own Occupation Disability is therefore a better option, especially for professionals in a specialised field, but this does come at an additional cost.
- With Total Disability, you would only be covered if you were unable to work at all.
Two forms of disability insurance benefit – monthly (income protection) and capital (lump-sum) benefit
Income protection may comprise either a permanent or a temporary benefit.
With permanent income protection, benefit payments will usually continue from date of disability until age 60 to 70. The level of cover is usually limited to 75% of our latest taxable income. The 75% applies in aggregate, meaning multiple policies may not, in total, exceed 100% of our present income. With temporary income protection, benefit payments do not normally exceed two years. The level of cover may not exceed our latest taxable income. This too applies in aggregate. As this cover is so important, the government does allow a tax deduction on your contributions.
Income protection premiums vary greatly between products, both within a particular insurer and across different insurers. These products need to be tailored to your personal requirements.
Here are some key points that you should consider:
- What is the waiting period before a disability insurance benefit commences? You need to ensure that you have sufficient funding of your own to cover this waiting period. As is to be expected, the longer the waiting period the lower the premium.
- When assessing the validity of a claim, will the assessment use your current occupation only or will it assess any occupation for which you are qualified? This may affect whether you get paid out for a claim or not, or whether you will be required to re-train for a similar occupation.
- Will the disability insurance benefit escalate annually? If it does not, inflation will impact negatively on your benefit payment over time.
- To what age will the benefit continue? Options may vary from age 55 to age 70.
Capital or lump-sum benefit?
An insurer will pay out a lump sum if you are deemed to be permanently disabled or permanently unable to earn an income. Capital disability cover should not be used to replace lost income. It should be used to settle debt and help with lifestyle adjustments that are required as a result of your disability. Examples would be to settle the bond or make modifications to your home or vehicle to assist you with your disability.
Should you have disability insurance cover?
The answer is clear: if you earn an income, or are going to be an income earner, then you should have some form of disability cover. Your ability to earn an income is your most valuable asset, and is likely to be the driving force behind the accumulation of any other assets over your working life. It is imperative that you have cover in the event that this earning ability is impaired. How much disability cover you need is dependent on your personal requirements and current financial affairs.
A CERTIFIED FINANCIAL PLANNER® should take you through a disability insurance scenario to assess the appropriate levels for income protection as well as capital disability.
Debbie Netto-Jonker CFP® is the founder of Netto Financial Services and was Financial Planner of the Year in 2001.