07 Jul Income protection covers your biggest asset
HOW DO I PROTECT MY BIGGEST ASSET?
Yes, the heading is spot on – your ability to earn an income is your biggest asset. When (not if) they steal your tv or your car… it will be a setback, but you will recover. Ask yourself, “If I lose my ability to earn an income due to sickness or disability, where do I (and my family) stand?” If, after reading this sentence you have a frown, you probably need to protect your income.
Assuming you do not have that rich uncle; let’s explore the best ways of removing that frown. From an insurance perspective, there are three ways of protecting your income and/or ability to earn an income.
You can do this via taking out a) capital disability insurance, b) monthly income protection insurance or c) a combination of the two.
- Capital disability: Will pay a lump sum if you are declared totally and permanently disabled. The emphasis here is on total and permanent disablement.
- Monthly income protection/disability: Will pay a monthly income for sickness, temporarily- and/or permanent disability. More than 80% of claims falls within this category. Therefore the importance of income protection speaks for itself.
- Capital disability and income protection: The ideal plan is to cover your debts and immediate expenses via capital disability and provide for your ongoing living expenses via income protection.
The latter is by far (in my opinion) the most important product of the three. A combination is ideal. We (Origin Financial Services) believe you should cover your outstanding debts via capital disability and your running expenses via income protection.
Income Protection Insurance
You are in a car accident or contract a severe illness. It is not deadly, but removes you from the working environment for 6 or 12 months (or longer). After this period you recover and go back to work. Your company will pay you for 30, maybe 45 days.
Will you be able to cover the rent, bond, car payments, additional medical bills and the rest of your normal monthly expenses for that period of time?
Income protection will pay for up to 24 months and thereafter it converts to permanent disability and will cover you until you reach retirement age. If your plan is constructed correctly, your income will increase with inflation until you reach your contracted retirement age.
Types of income protection:
- Own or similar occupation
This type of income protection is more affordable, but is suited for a specific occupational demographic only. If you are not employed in a professional or very specific occupational capacity, this might be the cover you require. In other words, should you become unable to perform your specific occupation, you might be able to be employed in another capacity that requires less physical or mental strain…and maybe for a little less income.
Example:
You are a bank clerk that deals with clients directly. Your interaction with these clients makes up 80% of your job. You are selling them the various products the bank has on offer. Unexpectedly (as accidents go) you have an injury that prohibits your ability to communicate with these clients successfully. You don’t make any more sales. BUT, you can still perform certain admin functions.
In this case you will have a very limited or no claim under the “own or similar occupation” benefit. You are still able to work, but not to the extent or in the capacity you were used to.
- Own occupation.
This option is slightly more expensive but offers the Rolls Royce benefit you would like when life throws you a rotten banana.
It is designed to offer you protection if you have a professional or very specific job description. It protects you should you lose the ability to perform your specific occupation.
Example:
You are an architect or graphic designer. You find yourself in one of life’s cruel and unforeseen situations and loose a hand or the ability to focus on/perform three dimensional designs. You are no longer fit to exercise your duties as a designer/architect, but you can still fulfil certain administrative functions in your practice / company (at a salary scale way below what you were used to). With the own occupation benefit, you will be compensated in full for any total or partial loss in income.
The point is to have an in-depth conversation with your financial planner. He/she needs to fully comprehend the complexities of your occupation in order to give the most suitable advice.
Income protection can be a minefield. Choose your adviser carefully and when you get dealt that rotten banana, you just might still manage a smile.
JOHAN GRAAFF
CERTIFIED FINANCIAL PLANNER
ORIGIN FINANCIAL SERVICES
082 076 9741
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