The Safety Net: income protection for the salaried and self-employed
In today’s fast-changing and competitive world, one of our major concerns is loss of income due to retrenchment, illness or injury. The latter two circumstances are more often the ones for which you can carry insurance – but with increasingly uncertain economic times, the option of insuring against job loss is one you can investigate to shore up loss of income in the event of company downsizing or closure.
Depending on the terms of your disability policy, you can cover up to 75% of your pre-tax income for the period you are off work – or up to the age of 65 if you are close to reaching that age. The time covered will be set at date of purchase of the policy. Premiums will obviously depend on the options chosen. If income is insured against job loss, then you might be able to insure for up to six month’s salary recompense should you not be able to find new employment during that time.
Whatever your choice and situation, there are risk services to meet your needs. Planning ahead is vital to both peace of mind and financial security when the unexpected strikes. Sometimes the risk we take is life itself.
Salaries and certainty
When setting up an income protection plan, you will have a choice between two main types of insurance. What you choose would be dependent on personal preference and your professional circumstances. Income protection is there to provide an income in case you are unable to work. When comparing options, you need to calculate how much cover you will need to meet commitments such as bonds, school fees, medical aid, debts, and general living costs.
Agreed Value policies – This means that the amount you will be covered for is agreed at the time you take the policy out. This can refer to up to 75% of your earnings at that time. Even if your salary changes over a number of years, your benefit will only be paid at that agreed amount.
Indemnity Value policies – This means that you are covered for up to 75% of your income at the time you make a claim, so you need to be able to show your current income when you claim. This type of policy works well for people with regular incomes.
Not all policies will cover you if you lose your job or suffer retrenchment. So it’s important to read the small print and make sure you understand the terms of the policy as the definitions, exclusions and benefits will nearly always vary. Be sure that you are clear on the finer points when you take out the cover, and that your expectations should you have to claim, are not unreasonable.
Income protection when you’re self-employed
Being self-employed means you are responsible for your own earnings. Should you be forced off because of sickness or injury, then you are unlikely to be earning any money during this time. You can protect yourself in several ways: put cash in a rainy day fund, have assets you can sell, engage the services of a company that can advise you on various options of insuring your business, etc.
Benefits of income protection for the self employed are designed to provide financial support if you are unable to work due to accident or sickness. Under these policies you will receive a monthly income until you return to work, or for a fixed period (typically 12 or 24 months). Income protection for your staff during this time should also be investigated. It’s advisable to keep your business running without you being there, so that you may return to a viable entity when you have recovered.
South Africa and some hard truths
In general, most South Africans are under-insured for disability. The mix of products sold needs to be revised and updated with the changing face of the economy. Many people are still choosing the Lump Sum Disability cover and neglecting the very important Income Protection cover – when both should be seen as essential for good planning and peace of mind.
Disability cover should include both Permanent and Temporary disability. The former will not be paid out to you if you are going to return to work within a couple of months. But while not enough attention is paid to the finer details on disability itself, not nearly enough consideration is given to insuring a monthly income.
Today self-employment is increasing and there are currently well over a million self-employed business people in the country. For these people even a few weeks of absence from their business can create major financial problems. There’s no sick leave pay for the self-employed – unless that which you arrange for yourself. There are many commitments that have to be dealt with even when your business is not operating. Bills must be paid – and therefore Income Protection insurance should be seriously considered – cover that will pay a fixed monthly income for a designated period to help you keep the wheels on.
This is a tricky one and the following aspects are most pertinent:
- Due to the factor of “anti-selection” – i.e.: the client who takes the benefit may be aware of impending retrenchment – not every insurer will offer this benefit. Those that do, usually offer the benefit for no longer than six months.
- You will have to prove that you have been retrenched in terms of labour law regulations – such as adverse business conditions, introduction of new technology or the re-organisation of business resulting in staff reduction.
- You can’t claim if you were retrenched in the first six months of taking out the policy, and you may be restricted to only claiming once every five years.
- Optional cover may be applicable to credit card debt (along with death and disability insurance) that will pay 10% of the average outstanding balance for up to four months in the event of retrenchment.
- It’s wise to make your own provisions for a rainy day by investing in a special fund to tide you over if you lose your job.
Finance in a nutshell – for life
Foster Private Clients, backed by the proud 28-year history of the Foster Group, believes in working for only the best results in all areas, from investments through to insurance we strive to create simple effective financial plans for our clients– We are mindful of every individual’s plans, dreams and goals – we are there to guide and advise you at each milestone of your financial journey, not only during your working years but well into retirement.
For us it’s about more than just protecting income and growing capital, it’s about the quality of your life and your peace of mind. That’s why we focus on building sound relationships based on professionalism, experience, and friendship. Find out more about us at: www.fosterprivateclients.co.za
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