Understanding the need for disability cover

Today, eighteen years ago, the owners of the World Trade Centre’s twin towers could never have imagined the simultaneous destruction of both towers. In fact, they believed the probability to be so far-fetched that they only ever insured one of the towers.

In a similar fashion, most of us cannot imagine a freak accident causing a permanent disability – and from a risk perspective our instincts would be right. It’s not the freak accidents we need to be fearful of, but the less ghoulish risks such as heart disease, diabetes, bone fractures, arthritis, back pain and joint disorders that place us at risk of being temporarily or permanently incapacitated.

Recent research has revealed that most South Africans are hopelessly under-insured in respect of disability – a situation brought about by a combination of affordability, lack of information on how insurance works, a misunderstanding of what causes disability, together with a healthy dose of ‘it’ll never happen to me’.

From an insurance perspective, the four greatest risks facing us are temporary illness or injury, permanent disability, critical illness and death – with injury and temporary illness being the greatest risks to our working careers. In fact, a person is nine-times more likely to have a temporary disability than to have their car stolen or hijacked.

According to Stats SA, there are currently 2.8 million South Africans living with disabilities, with younger people more adversely affected by disability because they have not had as much time to accumulate wealth and create a financial buffer.

FMI’s recent disability survey shows that a 25-year old has an 86% chance of suffering from a temporary disability, an 8% chance of being permanently disabled, a 23% chance of contracting a severe illness, and a 10% chance of dying before retirement. 92% of people between the ages of 25 and 32 are likely to sustain a temporary disability which will prevent them from working for 14 days or more.

Discovery Life’s stats show that 46% of its income protection claims are from clients below the age of 40; and according to Hollard, serious illnesses such as diabetes – often a cause of disability – are becoming more and more common in people under 50. Hollard also revealed that vehicle accidents, which are a significant cause of temporary and permanent disability, are most common in men under the age of 30.

The gap between how people perceive their risk and what their chances actually are forms part of the under-insurance problem.

According to the FMI survey, less than 50% of people think they will have a temporary disability in their lifetimes and do not have any form of disability cover. The truth, however, is that 70% of people will have at least one disability in their working careers that will prevent that from earning on either a temporary or permanent basis.

Of those surveyed, two-thirds said they would run out of money within 3 months of being unable to work. Interestingly, over 50% of respondents thought that insurance provides ‘death cover’ and did not realise that insurance could be used to protect against disability and severe illness.

Disability cover is widely available throughout South Africa and generally takes the form of either (a) a lump sum benefit or (b) an income protection benefit.

The purpose of disability insurance is to provide you with financial protection if you are unable to do your job and/or can no longer perform normal day-to-day functions such as bathing, dressing or eating. Because of the number and complexity of disability insurance options available in the market, consumers often attest to feeling overwhelmed and frustrated by the options.

In fact, the FMI survey found that consumers find insurance products to be overly complex, inefficient and expensive, with clumsy claims and administrative processes.

A financial advisor will be able to help you quantify your disability insurance needs, distill the options available to you, and find the most appropriate and cost-effective solution for your needs.

The reality remains that, while you are working and generating an income, your ability to earn is your greatest asset and should be protected. The quantum and type of disability cover will depend on your age, personal circumstances, earnings, debt levels, as well as how much retirement funding you have in place. In general, your financial advisor will consider the following:

Income protection

Income protection is a form of disability cover that is essentially a salary protection plan. In the event that you are temporarily or permanently disabled, this cover will provide you with between 75% and 100% of your taxable income.

If you are temporarily disabled, you will be generally be covered for a period of up to two years in aggregate. In the case of permanent disability, you will be covered up to your nominated retirement age which is generally age 65. It is important to ensure that your cover is linked to CPI so that your monthly pay out does not lose value over time in real terms.

For self-employed people and entrepreneurs, income protection is very important as not going to work generally means loss of earnings. If you are formally employed, it is likely that you have some form of group disability cover in place, and your advisor will take this into account when assessing your needs.

Lump sum cover

Lump sum disability cover provides a single capital pay out in the event that you are permanently disabled.

This form of insurance can be used effectively to settle home loans or debt in the event of a disability and can also provide much-needed financial assistance in respect of lifestyle adjustments, home renovations and vehicle modifications that may need to be made.

If income protection cover is not available to you for whatever reason, lump sum disability cover be used to provide an income, although this comes with inherent investment, longevity and inflationary risks. Having said that, your financial advisor will be able to assist you with calculating the correct quantum of cover.

As you move through the various life stages, your need for life, disability and critical illness cover will change.

An experienced advisor can help you formulate the right mix of life, capital disability, income protection and severe illness cover for your circumstances, and will review this cover at least annually to ensure that you are neither over- nor under-insured at any point in time.

Craig is a founding director and shareholder of Crue Invest (Pty) Ltd which he started in 2004 together with his wife, Sue.

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