Disability Cover and why you need it.
*This article was originally published on November 2019 and has been kept in its original form
Good advisors love asking the following question: “What is your most valuable asset?” The answers to this question range far and wide, with some answering the question by stating “my car”, “my house”, “my business”. Although all those are assets (some depreciating), the most valuable asset you have is in fact your ability to earn an income. Your ability to earn an income is exceptionally important, seeing as it enables you to fund assets, and expenses. The question then is why don’t most working individuals purchase disability insurance to protect them should something happen to their most valuable asset, their ability to earn an income? Whilst, in contrast, not many working individuals go without short term insurance for their car, home and personal belongings.
The 2019 ASISA Life and Disability Insurance Gap Study states that the disability insurance gap grew by 6.4% from 2018 – 2019. The part of this report that is truly problematic is that the majority of this insurance gap sits within the 9 million (out of the 15.6 million) working South Africans that are under 40 years old. This demographic of earners have a massive need for disability cover seeing as they are heavily indebted (paying off bonds, cars, etc.) whilst also saving for their retirement and children’s education.
Why the need for disability cover is specifically covered in this article (although South Africans are also underinsured for Life Cover), is that the need for disability insurance is higher than for life insurance, because household expenses tend to decrease when a family member dies whilst disability of a family member tends to increase household expenses. Rosemary Lightbody, senior policy adviser at ASISA confirms this: “When an earner becomes disabled, not only is the income likely to fall away, but household expenses also tend to increase due to the specific needs of a disabled person”. The Report also lists that based on statistics, on average, about 146 people will experience an event that will leave them disabled daily. The best time for you to purchase disability insurance is when you are young and healthy, the double-sided benefit is that this is the cheapest time to purchase cover, it is also the time when your potential loss is greatest.
For example, a 25-year-old has 480 potential paycheques coming in if they work until age 65, whilst a 45-year-old only has 240 paycheques remaining. Different options for disability cover are available: Lump-Sum Disability only covers permanent disability. Income Disability is cover that will cover your income for temporary or permanent disability or illness – most products cover you until your selected retirement age, then retirement planning will have to kick in.
These two cover options are not mutually exclusive and could work in conjunction. Income disability would keep your monthly expenses serviced whilst the lump-sum benefit could fund changes to your lifestyle, for example, wheelchairs, changes to your car, the building of ramps etc. Tax considerations: Income Disability payouts are not taxed, so you must cover your post-tax income – the amount on your policy will be the amount that you get out. It is very important to keep your insured amount up to date, and you should consult your Financial Advisor when you receive a salary increase or you have changes to your income. It is imperative to make sure that your disability cover has an in-claim escalation so that the benefit keeps track with inflation. There are a lot of individuals who view insurance as a grudge purchase, as they pay for something every month that they don’t see any benefit from, and I believe this view is incorrect. You should rather change your view and acknowledge that insurance is something that you pay for that provides you peace of mind in the event that illness or injury strikes that leaves you unable to work. It ensures that you are not left financially exposed at a time when you are physically fragile.
If you don’t have the cover at the time of the event there is little to no recourse to save you and your family from the onslaught of expenses. If you have any questions regarding this, don’t hesitate to get in touch, WE LOVE TO HELP
