How to insure your income

Imagine being unable to work and finding yourself suddenly without a salary. How would you pay the bills? There are ways to insure your salary and give you an income if you are disabled or ill. Here’s what you need to know about disability insurance or income protection plans.

Income insurance in a nutshellThere are two types of policies:

Disability insurance pays a lump sum amount if you are permanently disabled. 

Income protection insurance pays a percentage of your salary when you are temporarily disabled or ill and unable to work.

Do you need to protect your income?The first question you should always ask when taking insurance is: Do I need this policy?

There is no way of knowing whether or not you will become disabled, but there is a chance it could happen. Just think of things like road accidents that cause so much loss of life and disability in our country.

Insurers are finding that more people are claiming on disability policies. Claims against individual disability policies increased by 14% from July 2017 to June 2018, according to the Association for Savings and Investment South Africa.

Disability, whether it is permanent or temporary, is expensive. You need to be able to pay your daily expenses and there may be other things you need to pay for such as a home carer or adjustments to your house.

Sick leave benefits only last so long. The state offers a disability grant, but this can take up to three months to receive and it is limited to R1 780 a month, which is unlikely to cover all your expenses. It makes sense to consider insuring your income so that you are financially prepared in the event of a disability.

What kind of disability insurance is available?There are three types of insurance you can take to protect your income in South Africa. 1Life offers all of these.

Occupation-based lump sum disability insurance:

• Is based on your occupation – what you do – such as lawyer, accountant, sales consultant.
• You insure for a lump sum amount, such as R1 000 000.
• The policy pays a lump sum if you are disabled and cannot work in your own or a similar occupation. The payouts may be a percentage of the sum assured based on the severity of the disability. For example, loss of sight in one eye may pay 50% of the sum assured, loss of sight in both eyes may pay 100% of the sum assured.
• The disability must be permanent, such as loss of hearing or sight.
• Because it is based on your occupation you need to disclose everything about your job when you take disability insurance and make sure you tell your insurer if you change jobs.
• Is available during your working life. So, you can take out this insurance from ages 18 to 59. In the years 60 to 65 1Life Disability insurance reduces by a percentage each year until it is R0 at age 65 – which is retirement age.
• The policy will also end if the sum assured has been paid in full.

Event-based lump sum disability insurance:

• Is based on an event such as loss of a limb, loss of hearing or a head injury.
• You insure for a lump sum amount, such as R1 000 000.
• The policy pays a lump sum when an event happens, for instance, an arm or leg is amputated. As with occupation-based disability policies, a percentage of the sum assured may be paid depending on how severe the disability is.
• The disability must be permanent.
• This insurance can be taken out when you are between 18 and 59 years of age, but it lasts for life or until the full sum assured is claimed.

Income protection insurance:

• You insure a percentage of your income, such as 75% of your average salary over the last 12 months.
• The policy pays a percentage of your income (between 25% and 100%) if you are temporarily disabled or ill and unable to work.
• Income protection plans often have a deferment period which is the time between a claim being paid and a disability happening. So, if you suffer an injury and need to take time off to heal, a policy may have a deferment period of 7 days, which means benefits can be claimed after you have been off work for 7 days. Longer deferment periods can reduce premiums.
• Is only available during your working life, the ages of 18 to 59. The policy benefits reduce to zero over the five years from ages 60 – 65.

Which type of insurance is best for you?Although the different kinds of disability insurance all aim to make sure you don’t suffer financial hardship if you are disabled or ill, they are very different kinds of insurance that cover different needs.  So, it isn’t a question of which one best suits your needs but rather how much of both lump sum disability insurance and income protection you need!

Here’s why:

Your lump sum pay out from disability insurancecan be used to pay off debts such as a car debt or home loan, or to cover lifestyle modifications such as changing your car to hand controls or putting ramps and lifts in your home. You can invest a lump sum amount so that it provides an income, although you may need a large lump sum to give you enough monthly income.

Unless you have savings to cover the extra expenses that come with a disability and pay off debts, you are likely to need lump sum disability insurance.

The monthly payments that income protection plans offer replace your income when you are not earning. They also cover temporary disability which many lump sum policies do not.

If you became ill and could not work, would you be able to survive without a monthly income? If the answer is yes, you may not need income protection insurance. If the answer is no, you may need income protection insurance. 

At the end of the day you need a disability insurance lump sum pay-out to cater for extra expenses and you need to replace your income with another source of money such as income protection insurance. So, most of us will need both kinds of insurance. 

A few more details on disability insurance and income protectionGenerally, income protection policies, such as 1Life’s Expense Protector, are bought on their own. Disability policies can be bought on their own, or with other benefits such as life cover and dread disease.

There is a perception that these policies are expensive, but this isn’t always true - you can choose the amount of insurance that suits your wallet and your lifestyle. You can speak to your financial adviser about which insurance is appropriate for your needs or contact us for a quote or more information on our policies and how they work.

A final thoughtYour ability to earn an income is one of your most valuable assets. You can insure your most important asset – your salary - with income protection plans and disability insurance so that you and your family don’t suffer financial hardship if you are disabled.