Income protection plays a critical role in maintaining the financial wellbeing of your loved ones if illness or injury prevents you from working. Problem is, many South Africans don’t fully understand how their policies work, because they don’t read their policy documents.
“Income protection provides security when we need it the most. We talk a lot about ‘peace of mind’ when it comes to products like these, but the fact is that you need your income to pay all your other insurance, annuities, household expenses and school fees,” says Elmarie Samuel, Senior Technical Marketing Specialist at life insurer FMI (a Division of Bidvest Life Ltd).
So how do you go about making the most of your income protection policy? Samuel has the lowdown on what you need to know.
Know how much of your income is covered
You can insure up to 100% of your after-tax income. You may decide to insure less due to affordability, or simply because you don’t feel you need the full amount of cover. “Either way, make sure you’ve considered the financial impact if you ever land up with a long-term claim. Also, some insurers don’t allow you to cover 100% of your income, so make sure you choose an insurer that gives you this option,” says Samuel.
Know what waiting period you have selected
Waiting periods are one of the main causes of misunderstanding when it comes to income protection policies, and one of the main reasons claims are not paid. Policyholders often think the waiting period refers to the period their policy must be in place before they can claim, as is the case with some medical aid schemes. It isn’t.
“In income protection terms, the waiting period is the number of days you must be sick or unable to work before a claim will start paying. This is important to understand. If the period you’re unable to work is shorter than your waiting period, you will not qualify for a claim. Make sure you choose a policy that offers the shortest waiting period possible,” says Samuel.
Check if you have selected claims escalation
Claims escalation ensures that your claim payout increases in line with inflation every year. If you haven’t selected this option, you run the risk of your income payout staying the same throughout your claim period – which effectively means less money in real terms.
Know the duration of your benefit term
The benefit term is the maximum length of time you can claim for. There are options available for you to choose from. For example, on some temporary income protection policies, you have the option of a 3, 6, 12 or 24 month benefit term.
Know until what age you are covered for
There are different ages you can choose for when your cover will end. This age is often referred to as the ‘cease’ age. “Make sure you’re comfortable with the cease age you’ve selected, and that it’s in line with when you plan to retire,” says Samuel.
Keep your income protection policy up to date
If you change your occupation, or your salary changes, it’s important to notify your financial adviser to keep your policy up to date. A change in salary may affect the terms of your policy and result in you not getting paid the amount you were expecting if you were to claim.
“And when presented with a couple of insurance quotes to choose from, don’t just compare price: compare benefits,” says Samuel. “Ask your financial adviser what the waiting periods are, the benefit terms, the premium patterns and what the claims criteria are for each product. It may mean the difference between qualifying for a claim or not when you need it.”