One of my clients[1] is married with two children, in his mid-forties and an avid cyclist. He is also a freelance photographer working on a range of projects. A few weeks ago, while out on a long ride with his bike, his front wheel tire popped off the rim leading to a nasty fall. Fortunately, he suffered no serious injuries and there was no need for hospitalization. But he did get a nasty shot on his left elbow, resulting in great discomfort, some much needed physiotherapy, and as a result made it near impossible to take any photographs or to do even the most menial of tasks.
While my client agrees it could have been worse, he now also had zero income for a couple of weeks. Under normal circumstances it would be acceptable to dip into savings or to make use of an overdraft facility for the time being, but in the Covid strained economy and with many people already running on low or zero cash reserves, for many this is simply not an option. Fortunately, my client had an income protector, and he is also a good businessman, so he was able to weather the short-term storm, get some of his income back (thanks to his income protector). This incident again underscored the importance of the income protector as part of a financial management strategy.
LET’S AGREE ON A DEFINITION
Insurers offer a kaleidoscope of income protection products to consumers. Each of these products have their own unique terms, conditions, and requirements, but there is a universal definition in principle we can all agree on.
In a nutshell, income protection is a long-term insurance product designed to replace or supplement the policy holder’s income in the event of illness or injury which temporarily or permanently prevents the holder from earning an income.
THE IMPORTANCE OF THE DEFERRAL PERIOD
The deferral period is similar to a waiting period before one receives an income protection pay-out. A client can select 7 days, a month, or 3 months as a deferral period. The longer the deferral period, the cheaper the monthly premium, and vice versa.
It is important to keep in mind is that you have to be able to provide your own income during the deferral period. Don’t elect a 3-month deferral period to save on your monthly premium if you aren’t able to cover this period’s income.
One simple way to cover the deferral period, is to have a separate savings account with an equal value of cash invested. Be disciplined with this money, it is not to be used as normal income, else it would defeat the purpose entirely.
THE DEVIL’S IN THE DETAILS
The principle of an income protector product is reasonably plain and straightforward and the majority of the main insurers also offers more or less the same range of income protection products and benefits, with a number of exclusive benefits to try and compete against each other.
In spite of all the benefit, it’s the specific circumstances under which a policy holder will be paid out, that makes all the difference between either receiving an income or facing a financial challenge.
So be wary and read the fine print – remember that the devil is in the details as they say. Some products cover retrenchment, many don’t. Some insurers cover dangerous employment conditions (such as working under ground, with explosives or with heights) while others won’t provide such protection. Other examples of exclusions are professional athletes, or a stay-at-home parent. Make sure you know what the exclusions are!
HORSES FOR COURSES
Within the insurance industry, and considering all the elements of a well-developed investment and life insurance portfolio, there are a number of different types of insurance, each with their own role and purpose. Income protection is simply one of those instruments and it has a particular place within a portfolio.
As such the monthly premium structures also differ for each type of insurance, and many insurance elements are sometime bundled together under one product. For example, one can select a life cover product which offers both death and disability protection, as well as an income protection benefit. In many such cases insurers offer substantial discounts on premiums for bundles products in comparison with separate policies and products.
Income protection can be offered to both paid employees and business owners. Cover can be adjusted for fixed period, until the age of 65 or until the policy holder’s death, at a price.
While it sounds like a simple topic, the question of the appropriate duration of income protection cover is a rather technical decision. It is best to consult with your financial advisor when making this decision.
THE IMPORTANCE OF HAVING A FINANCIAL STRATEGY AND PLAN
In a previous article I wrote about five essential things you need to discuss with your financial advisor. One of them being the importance having a financial plan and strategy. A financial strategy is aimed at providing you with a diverse portfolio across a number of assets classes. Income protection is one of those elements needed in a balanced financial investment strategy.
Income protection is also a risk management tool and ensures that your investment portfolio, and other risk cover, is not jeopardized due to a loss of income. A period of intermittent income should not cause harm to future investment growth and earnings.
In short, income protection is not a stand-alone solution, but forms part of a greater financial plan.
THE BENEFITS OF HAVING AN INCOME PROTECTOR
Income protection products affords policy holders the opportunity to pay for monthly expenses.
Income protection offers the following benefits:
• Secure housing by being able to settle mortgage or rent payments.
• Settle monthly household bills such as essential services and food.
• Pay for university, college, school and other essential childcare costs.
• Cover additional healthcare costs (especially in cases where the injury or reason for the interruption of income).
• Secure transportation by being able to settle monthly vehicle finance.
• Pay for any short-term household alterations that me be required.
CLOSING REMARKS
We live in unpredictable times and according to a prominent insurance company in South Africa, one is nine times more likely to have a temporary disability than to have your car stolen or be hijacked, and 70% of people will experience at least one injury or illness during their working lives that will prevent them from earning an income.
Life comes at us fast and our own safety is not always guaranteed. We should always aim to sufficiently protect our financial portfolio and that we can at least maintain a reasonable lifestyle in case of serious injury or ill health over a short-term period.
At Oakfield Wealth Management we promote and advise the majority of our clients to opt for some form of income protection. The client I mentioned in the opening paragraphs was extremely fortunate to have an income protection product and had enough funds on hand for the interim, many families are not so lucky.
Protecting one’s income is especially important in a difficult economy where market conditions are tough, and businesses find it hard to continue operating. It is the responsible thing to do.
Local insurers offer great value for money in terms of benefits, and premiums are reasonably priced. In the long run, it’s well worth the effort to put sufficient income protection in place. [1] Real identity changed for protection of personal information purposes.