Income protection: Why is it necessary?

Introduction

Many people believe that the greatest asset you possess is your ability to earn an income. The reason is that the work you are able to do and the decisions you make regarding your money, career, and investments, etc. determine the amount of income you are able to generate which then determines the lifestyle you are able to have. So, if the ability to earn an income is your greatest asset, then why is it not seen as a priority to protect? Most of us have insurance to protect our cars, so why don’t we protect our income the same way? Think about it like this, if you were to lose your ability to earn, how would your life and the lives of those who depend on you be affected? Although there is no single cut and dry solution to protecting your income, as it depends on your own unique set of circumstances, there are options available to you should you fall victim to the life events described below.

1. Death

The Reason

No one likes to think about death or entertain the possibility of dying. But if you have people who rely on you financially, or have debt that needs servicing (car loan, home loan, credit card debt, etc.) then it is something you do need to plan for. Not planning for your death means you may risk saddling your family with a financial burden should something happen to you.

Your Options

Life cover is taking out insurance on your life so that if you had to unexpectedly die, your beneficiaries would be paid out the value you have specified. It’s quite a crude comparison but let’s pretend that you were a car that got written off. You may never be able to replace that exact same car (with the exact make, model, colour, year, mileage and dings), but with your insurance, you can replace the value of that vehicle. And while life cover will never fix the emotional loss of losing someone, it can provide financial peace of mind.

2. Temporary Disability

The Reason

If you had to become temporarily disabled and no longer able to work for an extended period of time, would you be able to pay your bills? Do you have suitable savings to fall back on? Would you have to drastically change your lifestyle in order to survive? Do you have a plan in place for the people relying on you for income? If you haven’t asked yourself these questions then I recommend you start doing so because you don’t ever want to say “I wish I had of…”.

Your Options

A temporary disability policy is possible as an add on to many risk-based products and most life covers include disability cover. Temporary Disability Cover will pay you a salary for a period of a maximum of 24 months whilst you recover and reenter the workforce.

3. Permanent Disability

The Reason

The thing about risk is that you usually don’t think about when you are fine and everything is going well. But, when things go wrong and you don’t have a plan, you will be stuck feeling helpless and full of regret. The fact of the matter is, although we can’t predict the future or what is going to happen to us, we can ensure we are at least a little prepared. If you had to get into a car accident for example and become permanently disabled, would you be able to earn what you do now? Would you be able to afford the treatment and lifestyle changes that this disability would require? If you had a family that relies on you, what would happen to them?

Your Options

To cover for permanent disability, there are two options that can either be combined or stand-alone. Firstly, you can cover yourself with a lump sum payment upon disability. This would ideally pay for any alterations in your life to make the situation you find yourself in more bearable. Alternatively, you may choose a cover that pays a monthly income to a maximum percentage of your current gross salary.

4. Dreaded Disease

The Reason

Your health is your wealth, especially if you, as your healthy self, are able to generate an income. But what if this were to suddenly change? A dreaded disease (for example cancer) will not only impede your ability to earn but the treatment could also cost you a pretty penny, especially if you don’t have medical aid or are on a limited plan.

Your Options

Dread disease cover is possible with a lump sum payout. This lump sum payout can be used as required. You may use it to pay off your medical costs, or, alternatively, if medical costs are covered, this money can be reinvested and an income is drawn off of it if needed.

5. Retrenchment

The Reason

With the state of the economy in the world and the ever changing working landscape, retrenchment is more likely and possible. You may be great at your job, but when employers start to feel the financial pinch, they may have to make some tough decisions. Think about this; if you had to get retrenched today, how long do you think it would take you to find another job? Unemployment rates in South Africa are extremely high, with even the most qualified individuals struggling to find a job. What if it took you 3 months to find another job? Would you and/or your family be able to pay bills and maintain your lifestyle?

Your Options

Retrenchment protection is possible through a risk cover option and will pay you a salary for a prescribed period of time whilst you are looking for your next job. Alternatively, you can protect yourself through a savings vehicle (i.e. ’emergency fund’). However, if you cannot save up quickly enough, then retrenchment protection is a good idea whilst you are saving up.

6. Getting Fired

The Reason

You probably haven’t thought about getting fired, and too be fair, with the policies protecting employees these days it’s not that easy. But let’s say you did get fired. What then? How would you live or replace that income?

Your Options

Most income protection products don’t really protect you from getting fired, and for good reason. Insurance companies aren’t eager to encourage people to provoke their boss into firing them so they can have an all-expense-paid 6-month holiday. Ok, so what options do I have then? Well, most financial experts recommend having 3 months’ salary saved in an emergency fund. Therefore, it may be worth considering taking out an investment so that you have a financial safety net for those events not provided for in risk products.

Conclusion

Protecting your ability to earn should be something to seriously consider especially if you have people who depend on you. You can’t predict life or know what’s going to happen in the future, this is what makes financial planning so important. As the old adage goes better to be safe than sorry.


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Example

Reginald Mbanjwa is a healthy, 31-year-old male with an undergraduate degree working as a Financial Manager. Reginald is married and has one child. His annual salary is R720,000.00. Reginald has a bond on his house for R1.8 million and the market value is at R2 million. Reginald has no other debt, his wife and child rely on him for a house which costs them around R25k per month including maintenance and his bond. His wife has a job and provided her house is covered she can afford the maintenance.

Life Cover RequiredR1.8million to settle bond + transfer costs to transfer house to wifes name. Approx – R2.25million @ R 335.25 per month
Disability Lump SumR1.8million to settle bond @ R259.20 per month
Temporary and Permanent Income CoverR360k per annum to cover living expenses and ensure maintenance at home. The premium to cover this is @ R238.80 per month
Dread Disease Cover3 x Annual Salary @ R 594.00 per month
Retrenchment ProtectionDue to Reginald’s occupation retrenchment may not be available

Total expected premium for this comprehensive cover will therefore be in the range of R1450.00 per month

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