DISABILITY COVER – DECODING THE SMOKE AND MIRRORS
For anyone of working age, disability benefits or cover are not a nice to have, they are a ‘have to have’ – but make sure you’re not swallowing a sugar-coated bitter pill that is going to give you an ulcer down the line. It isn’t the easiest benefit to understand, and many providers don’t help with all sorts of acronyms, abbreviations and BS, so let’s do some decoding.
In the old days you used to get ‘capital disability’ cover, where you had to be so severely disabled as to be a few months away from death before you were paid out. If they could push you behind a desk, you ‘could work’. This shoddy cover gave the whole benefit a bad name, and fortunately things have improved a whole bunch – but be aware – these inferior products still lurk around in some of the older ‘group benefits’ provided by companies.
There are 2 types of disability benefits – lumpsum and income protection, each of which has its merits.
Income protection cover, temporary and permanent, became very popular when SARS allowed the premium to be deducted from tax. That has now fallen away, (it was only a matter of time before SARS realised that it lost way more money in the rebate than it ever got back in taxing that income). Temporary cover can kick in from 7 days to 6 months. One month is the most popular. This is usually paid out on a ‘doctor’s note’ and lasts a maximum of two to three years.
What to look out for:
• The ‘waiting period’ is important and can result in a huge jump in premium. Before taking out 7 days (backdated to day one) consider having a one month safety net in savings instead.
• In some policies the distinction is made between ‘own occupation’ and ‘own or similar’ occupation. Although his comes with a premium difference, this distinction is another one of the major culprits of giving disability cover a bad name. For example if you were an architect and lost the use of your hands, and had ‘own or similar’ cover, it could be argued that being a lecturer would be a similar occupation (professionals were the first to be given a category of their own exempting them from this – at a price usually). This distinction is falling away, but the older insurers still use it. PPS and Liberty for example. It is important to find out how your provider determines disability – this changes all the time. It may be necessary for you to ‘upgrade’ your policy to take advantage of new definitions. Income protection is expensive, spend that money wisely.
• Temporary and permanent disability are usually decoupled, allowing you to allocate different amounts to each. Temporary cover should cover all your fixed expenses, permanent disability should replace your current salary so that you can still save toward retirement.
Permanent disability: This can be structured as an income, or a lumpsum, or both. Now that the Income premium is no longer tax deductible, I am using lumpsums much more than in the past. There is one provider that will allow you choose which of these two you prefer at claim stage. Best of both worlds – why? If your prognosis is poor at claims stage – then take the lumpsum, or your family might just get a few monthly payouts and die with you, basically ‘wasting’ years of premiums.
Recommendation : Get your advisor to check your benefits annually, adding back your group benefits if you have them. You need to have the right mix of temporary/permanent lump-sum/income. The lump sum amount should be worked out using the ‘discounted rate of return’ method, not a thumbsuck. Make sure you always have the latest benefits (unless you become ‘uninsurable’)
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Comments and sharing welcome…
Author Dawn Ridler