If you earn an income, you need to have income protection insurance.
According to Bidvest Life’s research, a 30-year-old male has a 15% chance of dying before the end of his working career but a 91% chance of being unable to work for a period of two weeks or more during his working career.
What is income protection?
Income protection is a long-term insurance policy that replaces or supplements your income if you are retrenched, get a critical illness or become disabled so that you cannot earn a living for a while, or permanently. It will continue to do so until you retire, are able to return to work or upon death – whatever comes first.
Read: How Much Should I Save For Retirement
Income protection is a safety net during difficult times.
What does it cover?
Income protection insurance:
- provides regular payments that replace part of your income if you’re unable to work due to illness or an accident
- pays out until you can start working again – or until you retire, die or reach the end of the policy term – whichever is sooner
- typically pays out between 50% and 65% of your income if you’re unable to work
- covers most illnesses that leave you unable to work – either in the short or long term (depending on the type of policy and its definition of incapacity)
- can be claimed as many times as you need to while the policy lasts.
Not all policies cover retrenchment or job loss, so check this before you commit.
Do you need it?
Anything can happen, and if you lose your income, you still need to pay your bills. If it happens that you fall ill and your sick leave is depleted or doesn’t cover long-term illness, income protection fills that gap too.
Read: Why you need an emergency fund
You should consider income protection if:
- You have debt: if you have loans to repay you should seriously consider getting income protection to ensure that you can still pay your instalments if you lose your income
- You’re the sole breadwinner: if your family is financially dependent on you and there isn’t an extra income, you’ll need a safety net if you lose your income.
Read: How to use Debt Snowball to pay off debt
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How much income insurance cost?
The amount you pay each month in premiums will depend on the policy and your circumstances.
You are paid out according to the level of cover you have taken out, based on a percentage of your income. This percentage is typically between 50%-75% but can also be increased to a full 100% with top-up benefit structures.
Income protection policies cover a wide range of illnesses, conditions and situations. So it’s important to compare what different insurers can offer you.
There are three levels of cover that you need to be aware of;
- Own occupation cover: Which covers you if you are unable to work under your own occupation.
- Suited occupation: Catered to you if you are unable to do your own job, or a similar one that with your qualifications.
- Any occupation: Covers your income if you can’t work at all.
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When to claim income protection insurance?
When you are under an income protection plan, you can claim whenever you need to as long as you keep up with your monthly premiums.
For example, if you were insured and paying premiums based on an R27 000 income every month, and the year before you claimed you were earning less than that, you will only receive a payout based on what you were earning before you claimed in the last 12 months.
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This is important to remember when you are wanting to start your own business after working as an employee. If you claim when you are a freelancer, you will only be paid an income based on your most recent earnings and not what you were earning as a salaried employee.
When will I receive my income after claiming?
Income protection policies don’t necessarily pay out as soon as a claim is made. You need to wait for a pre-agreed period to pass, known as a ‘deferral period’.
That is decided on when you take out the cover and can range from a few weeks up to a year. The longer the deferred period, the cheaper the monthly premiums will be up to the moment of (if) any claim. The shorter the waiting period the more expensive the cover, as the risk is perceived higher by the insurer.
Who gets paid?
Income Protection claims will be paid to you, the policyholder.
How long will the income be paid?
The income will be paid as long as you’re disabled to the extent that it causes you to lose part of your income. You can receive payment up to age 70.
When will income protection not pay out?
Income Protection will not pay a claim if:
- Your disability is self-inflicted
- You become disabled as a result of participating in something illegal
- You’ve been wilfully misleading with the information you provided us
- You become disabled from taking part in motor sport, motorized racing or speed contests
- The claim is due to normal pregnancy, normal childbirth, an elective caesarean section, or due to a rehabilitation or detoxification programme
- You become disabled as a result of taking part in any of the following aviation activities: aerial photography, pylon racing, game spotting, aerobic display, crop spraying or herd thinning
- You do one of the following jobs:
- Sport as a profession;
- Pilot;
- Air traffic controller;
- Jockey;
- Drivers of public transport including taxi drivers; or
- Stay-at-home parents
Is the claim payout taxable?
No. Under current taxation laws, you won’t pay any tax on the claim payout.
Read: Tax-free Investment Account: frequently asked questions
How is income protection different to disability cover?
Income protection refers to products that pay a monthly income if you are unable to work, either temporarily or permanently, due to illness or injury. Disability cover refers to benefits that pay out a lump sum if an illness or injury renders you permanently unable to work.
Read: What is dread disease cover
How is income protection different to unemployment fund
Unemployment income protection covers employees by paying a monthly income when they become unemployed under different circumstances other than health, like retrenchment.
Please speak to your financial advisor if you need assistance in this regard or wish to review your current position in terms of income protection cover.
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