Picture: 123RF/ RUSLAN IVANTSOV
Picture: 123RF/ RUSLAN IVANTSOV

Not all income protection policies are created equal, and being aware of key features to look out for can avoid disappointment and a financial shortfall at claims stage.

An income protection policy pays out your income, or a percentage of it, when you are unable to work. It typically offers better protection against loss of income than a lump-sum disability cover, but you need to navigate some policy pitfalls.

You need to make sure your insurer covers you for both temporary and permanent disability — many severe illnesses can put you off work for long periods, but because you are most likely to recover, you will not qualify for permanent disability benefits.

You are much more likely to suffer a temporary disability than a permanent one, with statistics from life insurer FMI showing that seven out of 10 people will suffer a temporary disability in their lifetimes.

But even with temporary disability cover, you could be out of pocket with a claim if a life assurer requires you to prove loss of income or if your insurer reduces the income it pays by the payments you receive for work you actually did in previous months, industry experts say.

Schalk Malan, CEO at life company BrightRock, says there are two common practices in the life assurance industry that can delay or reduce the income you are expecting to receive when you claim under your income-protection policy.

The first is the requirement that you prove your loss of income and the second is known in industry jargon as “aggregation against active income”. Aggregation against active income is the practice some insurers use to reduce the income you claim based on income you receive for work you carried out in the months before your illness or injury, he says.

Your ability to earn an income is your greatest asset, so it is vital you take the time to ensure it is properly covered
Karen Bongers, product actuary at Sanlam Individual Life

FMI CE Brad Toerien says if you are self-employed you should avoid a policy that will not pay if the period during which you are temporarily disabled does not coincide with your loss of income. If you are invoicing at month-end and being paid 30 days later, for example, you may be off work in May but could still earn income from work done in March or April, he adds.

Malan says some insurers will only pay once your income has actually decreased or dropped to zero, and this provision, together with a waiting period (which you choose when you take out the policy) of, say, one month, means your claim will only be paid two to three months after you’ve been unable to work.

The most comprehensive policies will pay on a sick note as well as on proof of diagnosis of one of a list of specified conditions for which a minimum payment is ensured. For example, a policy may guarantee two months’ worth of income commencing after the waiting period for a self-employed professional who has knee-reconstruction ligament surgery, Malan says.

You should also ensure your income replacement policy covers you for partial disability as one in seven claims received by FMI in 2018 were for claims for partial disability and these can be complex to assess, Toerien says.

A partial disability claim is one you would make when you are able to perform some, but not all, of your normal duties. You might claim for a partial disability when you first fall ill, or when your health recovers to a point where you can gradually return to work.

For partial disability claims, some insurers generally require you to prove either a loss of income or that you can only perform a percentage of your duties, while others give you the option of choosing between the two, giving you the ability to choose the one with highest possible payout, Toerien adds.

What happens after your temporary cover ends?

Most income protection policies will stop paying a temporary income benefit after 24 months, or the cover will reduce from 100% to 75% of your income.

If you are still unable to work after 24 months, your income needs are unlikely to decrease and may actually increase due to the high cost of living with a disability, Toerien says.

He adds that many temporary disabilities continue beyond 24 months — for example, a critical illness that requires intermittent treatment.

A total of 1.8% of all claims to FMI in 2018 lasted longer than a year, but 40% of these claims were for disabilities that were not permanent, he says.

Malan suggests you choose an insurer that provides you with cover equal to your full net income and where a permanent claim is triggered after a 24-month temporary claim.

He says BrightRock defines permanent disability clinically as, for example, stage-four cancer, the loss of a hand, becoming blind or being declared unable to do your own occupation by an independent occupational therapist.

Ongoing cover

Look for an insurer that does not require you to notify them of changes in jobs, smoker status or dangerous activities such as scuba diving or motocross in order to enjoy ongoing disability cover.

Historically, insurers excluded benefits for injuries arising from dangerous activities or charged you more if you took up such activities after you took out your policy, but this is no longer the case with all insurers, Malan says.

Temporary disability cover typically stops at retirement age, but some companies will allow you to move this cover to another benefit, such as critical illness or death cover without any medical tests, Malan says. The benefit is that you could later claim for events such as knee replacements, Parkinson’s disease or dementia.

Many people are living longer and continue to work long after the traditional retirement age of 65. Make sure you can protect your income for as long as you expect to continue working. Some insurers offer temporary income protection up to the age of 75.

Karen Bongers, product actuary at Sanlam Individual Life, says each insurer offers a different set of benefits and various optional add-ons are available on income benefit policies. She suggests you seek help from an accredited financial adviser.

Your ability to earn an income is your greatest asset, so it is vital you take the time to ensure it is properly covered, she says.