Loss of income is dangerously underestimated

Posted on 20 May, 19 by BrightRock

You are nine times more likely to have a temporary disability than to have your car stolen or hijacked in SA, Brad Toerien, CE of life insurer FMI says.

Most people don’t think twice about insuring their car, but few consider protecting the income that makes paying for it possible, he says.

It costs about R900 a month to insure a 2018 VW Polo but only R480 a month for income protection if you are a 35-year-old non-smoking woman who earns R40,000 a month.

To put it into perspective, in this scenario, the cost of insuring a 2018 VW Polo valued at around R250,000 is double the cost of protecting her monthly income and securing her future earnings.

This is even more surprising when you consider that a 35-year-old earning R40,000 a month will likely earn more than R43m during her working career to 65. Yet, income protection remains dangerously undersold, Toerien says.

Seven out of 10 people will experience at least one injury or illness during their working lives that will prevent them from being able to earn their income, according to figures released this week by FMI, a life assurer in the Bidvest group in its annual claims presentation for the 2018 period.

The risk of illness or injury for a temporary period is significantly greater than the risk of dying, becoming permanently disabled or contracting a critical illness and is therefore the risk we should all be most worried about, Toerien says.

Alarmingly for the self-employed, your risk of a temporary disability from illness or injury that will stop you from working for at least two weeks is exponentially higher than the risk of permanent disability or critical illness at every age.

FMI’s statistics show that the chance of a 25-year-old being temporarily disabled some time during their working career is 92%, that of a 32-year-old 91%, of a 50-year-old 81% and of a 62-year-old 57%.

And if you think you are OK because you work for a company and your sick leave can easily cover you for a temporary illness or injury, think again.

According to FMI’s statistics, the average number of days off work for a claim for accidents is 66 days and for illnesses and medical procedures is 52 days.

You may already have used up a substantial part of your sick leave and be left with only a few days at a time when you need it most, adds Karen Bongers, product actuary at Sanlam Individual Life.

Toerien says it can take more than a year to qualify for a permanent disability claim, but if you’re unable to work for an extended period before your claim is approved this could have serious financial consequences.

An income protection policy that pays out after a short waiting period is the smart way to protect yourself from this potential financial disaster.

The risks of self-insuring

People don’t properly consider what will happen if they cannot work for a period of time. In the back of their minds they may think they will use their savings, or that their spouse will still be earning an income, says Bongers. However, most families rely on two incomes and the loss of one income will impact the family finances.

If your savings are earmarked for a goal such as your children’s education or your retirement, you need those savings to meet those goals and not to dip into it for monthly expenses if you are unable to work. The longer you are unable to work, the greater the chance that your savings will simply run out, Bongers says.

Toerien says your savings may not extend to covering a second or third time when you cannot earn an income. FMI statistics show that multiple claims are common. You are three times more likely to claim again after your first claim.

Some employees rely on the group benefits available through their employer.

But, Toerien says, most group benefits do not have a temporary income benefit and if they do, they have a 90-day waiting period. FMI’s statistics show that 88% of claims were for periods of less than 90 days during which the policyholder could not work.

BrightRock CE Schalk Malan says it’s easy to calculate how much income protection you require by adding up your monthly bills such as rent, water and electricity, loan repayments, transport, food bill and children’s school fees in a monthly budget.

Toerien says three forms of risk cover are touted by the life insurance industry: disability, dread disease and death cover, but he believes you should consider long-term and temporary disability as separate benefits.

FMI strongly recommends that you protect your income first and then only consider how much lump-sum disability cover you need. Income protection cover is typically 20% to 25% cheaper than the equivalent lump-sum disability cover, Toerien says.

FMI has calculated that the premium saving you can make on an income protection policy over your working life from age 35 to 65 at a salary of R40,000 a month, could amount to more than twice your annual salary at retirement.

This article was written by Charlene Steenkamp and originally published in the Sunday Times on 19 May 2019.