How to protect your income with an insurance policy

Income protection is a long-term insurance policy designed to supplement your income in circumstances where you are unable to work because you’re ill or injured.

It will continue to do so until you retire, are able to return to work or upon death – whatever comes first. It is an important part of an overall risk plan and financial strategy.

The level of income cover is based on a percentage of your income, typically between 50% and 75%, but can be increased to 100% with top-up type income protection benefit structures.

In some way or form, it can help sustain the lifestyle you have become accustomed to.

There are options of temporary and/or extended cover which can cover you to the ages of 65 to 70, or even whole-of-life.

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 any claim.

The shorter the waiting period the more expensive the cover, as the risk is perceived higher by the insurer.

One can select to have a waiting period, for example seven days, one month, three months, before the benefit kicks in. If you choose a long deferred period, you’ll need to be certain of sick pay, or that you have the savings to cover all your expenses.

For business owners or self-employed people who are not afforded sick or annual leave privileges, the risk is higher, especially if they can only perform their occupation partially.

A good structure is to combine sickness benefit (which will pay out when booked off by a doctor), covering short and medium-term needs, with a “permanent incapacity benefit”, covering long term income generation (here you will need to provide proof of loss of income).

A sickness benefit is especially relevant for professionals earning a fee from client consultations, such as lawyers and doctors.

The livelihoods of the business’ salaried employees are also at stake, so the knock-on effect can be substantial and devastating.

There are many variables at play and every individual’s circumstance is unique, not to mention the fact that income protection products are in general more expensive than lump-sum disability insurance.

Choices of structure and substance should be discussed in detail with a financial advisor and in the context of reaching certain long-term financial objectives.

Income protection cover should also not be confused with an accident, critical illness or unemployment insurances, which all work in different ways – in both premium and payout – and are offered by various institutions, with their own terms and conditions.

This content was prepared in consultation with financial planner Leslie Greyling.

Andre Basson is a financial planner at Brenthurst Wealth

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