/ 7 August 2007

Healthy cover for sick days

Younger people will face the biggest financial losses if they do not have enough insurance to replace their income should they become disabled or ill — simply because they have a longer life span during which they need to draw an income.

When we are in the prime of our youth we might feel invincible, but the reality is that 20% of disability claims are a result of car accidents, which tend to affect younger people.

Kenny Rabson, of Discovery Life, says dread-disease claims from younger people are starting to become a major factor because cancer claims from 30- to 40-year-olds are growing rapidly.

Crime — with car accidents — is playing a bigger role in death claims and crime affects people of all ages.

You need to consider certain aspects when taking out disability cover:

  • What cover should I take?
  • Rabson says there are two ways of buying cover. The first is disability cover, which pays out a lump sum when you are no longer able to work. The second is an income protector that usually pays out 75% of your income for the rest of your life. It will also pay you a monthly income if you are unable to work for a short period of time. He says, ideally, you should have a bit of both.

    If you want to buy only a lump sum and you are 40 years old earning R300 000, you would need cover of R6-million, which would be pretty expensive. The lump sum should rather be used to pay for immediate expenses as a result of your disability or dread disease. Disability cover would pay out only if you were permanently unable to work and dread disease pays out according to the severity of the illness. The income protector, apart from paying out for permanent disability, would kick in if you were unable to work for a short period of time and it is tax deductible.

  • What are you covered for?
  • Disability cover and income protection have had some bad press because the decision to pay out in the past often appeared subjective. But, Rabson says, today the cover is set out clearly in a policy document so that you know up front what conditions are covered. For example, a chronic illness such as asthma can be considered disabling.

    Rabson says not all policies cover the same things. If you have a family history of a particular illness, make sure it is covered in the policy. Ensure there are no gaps in body coverage. For example, is your respiratory system covered? Insist on a check list from your broker.

  • Premium guarantees
  • Are the premiums guaranteed? What if, because of bad underwriting decisions, the life office suddenly doubles its rates? Some life companies offer guarantees and capped increases. Some of the larger ones don’t, but Rabson says they would run such huge reputational risk if they did double premiums that it is unlikely they ever would. But it is best to stick to a well-run life company.

  • What your employer provides
  • Check if your employer provides income protection. Not all do. But many do provide disability cover.

    Rabson says you should ensure that there is a continuation option, which — if you resign or retire — allows you to keep the cover without having to undergo further medicals.

    Even if your employer provides a basic level of cover, usually about three times your annual salary, you need to check that this is enough to meet your needs. Your annual salary calculation could be lower than you realise because it would not include your car allowance and medical aid deductions, for example.

    Most employers do not offer dread disease cover.

  • When does income protection kick in?
  • The longer the waiting period, the cheaper the cover. If your cover pays out only if you are unable to work for a month, it will be a lot cheaper than cover that pays out after a week.

    But read the fine print. Rabson says Discovery will back-pay to day one if you are ill for a week, while other policies might back-pay only for three of those seven days.

    How much cover you need is driven by your circumstances. If your employer will pay you your salary for three months if you are unable to work, buying the one-week policy would be a waste of premiums.

    Rabson says, in general, the self-employed would want to take a seven-day cover, but you might want to consider how much you can afford to self-insure by having some money in an account to cover a month off work.

  • Until what age do you need cover?
  • Income protection should not be necessary after 65 if you retire then. But Rabson says it is important to ensure you maintain your dread-disease cover because most chronic illnesses start after 65.

    Disability cover is most commonly taken to age 65 or 70 because its aim is to replace income.

    You should find out if you are able to convert your lump sum disability cover to dread-disease cover.