Financial Planning

Reaping benefits of TIP in the long run

A recent FMI study revealed that three out of ten people are likely to suffer from some sort of temporary disability before the age of 60. The real risk to financial advisors and their self-employed clients lies in frequent temporary interruptions rather than a single long-term disabling event. Financial advisors should, therefore, pay more attention to temporary income protection (TIP) when addressing client’s disability cover needs.

Research revealed that more people invest in permanent than in temporary disability cover – the latter equated to only 6% of all new disability premiums sold in 2010. This gap needs to be addressed by financial advisors, as frequent temporary interruptions to income generation are where the real risk lies. This is especially important considering the damage done lies, not just in the immediate disruption to cash flow, but in the long-term impact on small business stability.

In addition, standard disability benefits don’t cover temporary or illness-related claims and tend to carry a three to six month waiting period. Considering the frequency and duration of temporary disabilities, this leaves an obvious gap in the financial planning process.

Small business owners are particularly at risk. Temporary interruptions may not have the impact of a permanent disability, but they can have serious consequences on an individual’s business, lifestyle and financial portfolio.

At FMI, we have a number of examples where temporary disability cover has proved, if not a life-saver then, at the very least, a lifestyle saver – a commission-earning salesman suffering from depression, a fitter and turner with something as simple as a broken finger which prevented him from working, a car mechanic who was the gunshot victim of crime and needed 8 months to recover, and people from almost every sector who have suffered debilitating back ailments.

The consequences of temporary disability can also reach far beyond the disability period, having a permanent impact on business stability. For the small business owner, temporary disability might mean an interruption in cash flow or sacrificing expenditures such as insurance, investment, and medical aid cover which can result in business failure or future insurability problems.

The industry approach to disability is flawed and reinforced by most FNA tools which are used to simply calculate a client’s ‘disability needs’, with an emphasis on permanent cover. Consideration is rarely given to understanding the impact of a temporary interruption in income. Research has proved that the average South African income earner is under-insured by 60%. This just shows that temporary disability income continues to be misunderstood and undersold.

The obvious solution for income earners is to be covered by both temporary and permanent disability insurance. Permanent disability cover can be paid out as a lump sum which can be utilised for once-off events such as settling outstanding debts, for business assurance purposes, to contribute towards an investment, or to prepare for major lifestyle changes.

The risk of this kind of benefit lies in the fact that the client can outlive the pay-out. This makes income replacement benefits an attractive solution. The aforementioned is designed to cover both permanent and long temporary disabilities, is paid out on a monthly basis to match the client’s income over time, and premiums can also be increased in line with inflation. This cover is suitable for maintaining a client’s lifestyle and meeting cash flow requirements.

To ensure holistic disability cover, the financial advisor should ensure that clients are protected against long-term disability and more frequent short-term disabilities. All in all, ensuring that clients are protected in the short term as well as longer term will not only be of great benefit to clients, but will mean less risk for financial advisors as insurance premiums are protected and lapse rates are minimised.

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