Laura du Preez | 17 November 2021
Laura du Preez has been writing about personal finance topics for more than 20 years, including eight years as personal finance editor for two leading media houses.
The Covid-19 pandemic has proven how at risk we are of falling ill and being unable to work. The risk of losing income is particularly high if you run your own business, manage a practice or earn an income as a contractor or freelancer in the gig economy.
Insuring your income can reduce the anxiety, but most South Africans are still taking out lump sum disability cover that fails to provide cover for an inability to work due to shorter-term injuries or illnesses, industry statistics reveal.
The pandemic continues to show that income protection cover is the most effective insurance against the risk you face from disability including temporary disability, Leza Wells, chief product actuary at life insurer FMI, says.
However, only 7% of life insurance policies sold in 2019 were those with a monthly income benefit. Most South Africans (61%) took out lump sum cover for death and 32% took out lump sum cover against disability and severe illness, Wells says quoting the Swiss-Re New Business Volume Survey for 2019.
Among Old Mutual’s policyholders with disability cover, 85% have only a lump sum benefit, despite the fact that income protection benefits will pay out first, John Kotze, retail protection product head at Old Mutual, says.
Cover if you are ill for seven days
A monthly income benefit for as long as you cannot work offers protection against your inability to work if injury or illness puts you off work for a period as short as seven days. Disability cover that pays a lump sum, however, is likely to only protect you if you never return to work.
The likelihood of being off work for a short period is much higher than that of not being able to return to work at all.
Kotze says affordability is a reason why many policyholders choose lump sum benefits.
The pandemic, however, illustrates why it is worth paying more – Wells says one third of claims paid by FMI last year were for Covid-related ones. She adds that the average length of time claimed on a Covid claim was 18 days.
It is not only Covid that may put you out of work without you being able to claim on a lump sum disability policy. Illnesses such as cancer and stroke may also not qualify you for a lump sum claim despite laying you up for much more than just 18 days.
An FMI policyholder who had a stroke claimed on an income protection policy for just over a year while undergoing rehabilitation.
Long Covid – when Covid symptoms linger long after your initial recovery - can also prevent you from working for extended periods, but may not necessarily qualify as a permanent disability.
Wells says many people who suffer with long Covid symptoms gradually return to work. Income protection can substitute partial income losses while you complete rehabilitation and ease back into work.
Among the top 10 causes of FMI’s claims, only two were ones that would result in permanent disability. The top three causes of claims – infections, cancer and mental health – are all ones from which you could recover, which is why income protection cover offers you a greater likelihood of being able to claim.
Waiting periods
When you take out income protection with temporary illness cover you also need to give some thought to how short the waiting period on your policy should be. The waiting period on an income protection policy is the minimum period for which you need to be ill before you can claim.
The shortest waiting period is seven days, Karen Bongers, product development actuary at Sanlam, says.
You can qualify for a payment from the first day you become unable to work, but only if you are disabled for more than seven days, Kotze explains. Wells says FMI also backdates payments to day one, except if a policyholder claims for an infection which did not result in them being hospitalised.
Wells says only 17% of the temporary income protection policies FMI has sold for the past five years have had seven-day waiting periods. FMI found 40% of its claims last year were for illnesses that lasted less than 30 days.
30-days most popular
Most of Sanlam’s income protection policyholders (59%) opted for waiting periods of a month or more, Bongers says.
A 30-day waiting period is most popular for employees, while the seven-day waiting period is more popular for self-employed people and those in their own practices, such as medical doctors,
Kotze says.
If you have a 30-day waiting period and are unable to work for this period, you could qualify for a payment from day 15, he says.
If you enjoy paid sick leave of 30-days, this waiting period may be appropriate.
However, Wells says many employees do not have all 30 days available as they have already used some of this leave. For this reason, FMI offers a 14-day waiting period for employees.
Policyholders also choose longer waiting periods because they are more affordable.
Pricing premiums
Kotze says premiums are determined by a number of factors including age, gender, smoker status, income and qualifications. On a very rough average, you could expect the premium on an income protection policy with a 30-day waiting period to be 35% less than the premium for a seven-day waiting period.
Bongers agrees premiums depend on the benefit and rating factors that apply to you, but she says a 14-day waiting period could be about 25% cheaper than a seven-day one, and a one-month waiting period could be about 50% cheaper than a seven-day one.
If you can self-insure by saving what you need to cover your income for shorter-term illnesses in an emergency fund, you can take the cheaper cover with a longer waiting period.
Kotze says the key consideration is whether you have the discipline to keep that amount of money aside for this reason.
Wells says many middle- and lower-income earners do not have enough saved to self-insure.
A 2018 survey FMI conducted showed that more than six out of 10 consumers will run out of money within three months if they lose their income due to injury or illness.
Almost one in five said their house and assets would be repossessed, while one in seven would no longer be able to pay school fees.
Wells says illness often comes with additional medical expenses, and sometimes your medical scheme will not cover every expense.
Both she and Bongers point out that you may suffer repeated periods of illness, and may not have enough savings to self-insure each time.
Bongers says a 14-day waiting period is often a good compromise in that it is more affordable than a seven-day one but offers better protection than a 30-day one.
