Based on traditional industry practice, the approach to Disability cover has predominantly favoured selling Lump Sum benefits over monthly Income benefits. The stats back this up: 77% of Disability cover sold is a once-off lump sum, as opposed to 23% being Income benefits. That’s according to the True South Disability Study, commissioned in 2017 by FMI, a division of Bidvest Life.
This is a concern, considering that Lump Sum benefits typically would only pay a client on proof of permanent disability, and yet the reality is most injuries and illnesses are temporary. According to FMI’s 2018 Claims Stats, the biggest risk any individual will face throughout their working career is a temporary injury or illness that will last between 1 – 60 days.
The negative impact on retirement planning
Taking this lump sum only approach can have a negative impact on investment planning and adversely affect your clients’ retirement prospects for 2 key reasons:
1. Keeping up with investment premiums
According to FMI’s 2018 #RealityCheck Consumer Survey, 62% of respondents said they’d run out of money within 3 months of not earning their salary. If a client were to get sick or injured and couldn’t earn an income, how would they pay their monthly investment or RA contributions? They may be forced to stop payments, incurring penalties and fees as a result.
2. Impact on retirement plans
Three months of lost income can have a massive impact on retirement plans. Take a 35-year old earning R30 000 a month as an example. An accident or illness that books them off for 3 months would ‘cost’ them R2,6 million in lost income by the age of 65. This means that they’d either have to live on 10% less income when they retire, or they’d have to work for 21 months past their planned retirement age of 65 to make up this income1.
However, simply having Income Protection is not enough. As an adviser, you play a critical role in guiding your clients in making well-informed decisions concerning choosing the right waiting period, amount of cover required, the policy termination age and effective future insurability. Making the wrong decision can mean the difference between qualifying for a claim or not, which will ultimately impact your clients’ retirement prospects.
According to FMI’s 2018 Claims Stats, 60% of clients chose waiting periods of 30 days or longer. And yet, over half of FMI’s claims lasted less than a month. That’s why it’s important to ensure your clients choose the shortest waiting period possible! Look for insurers that offer the shortest possible waiting period for your client’s occupation.
Amount of cover
With 72.5% of household income in South Africa going to servicing debt2, your clients can’t afford to protect anything less than 100% of their income. In fact, insurers like FMI are increasing payments to 130% of insured income for critical illnesses, as the cost of living when you’re sick or injured is increased significantly.
Protect your clients until their real retirement age
Most clients select 60 or 65 as the termination age on policies. However, it shouldn’t come as any surprise that people are living longer than ever before. In their book, The 100 Year Life, Andrew Scott and Lynda Gratton write about how people born today will live to 104 years. Adding medical advances, improved nutrition and education, longevity continues to increase.
And with living longer comes the need to work longer. That’s why it’s important to ensure your clients choose a policy where they can cover 100% of their income up to age 75, should they still be working.
Your clients need flexible and tailored insurance solutions that can adapt through life’s ups and downs and through any life stage they may be in – with no restrictions, even if they’ve claimed or their health changes.
The reality is, your clients’ greatest risk is the risk of not being able to work due to a short-term illness or injury, and without Income Protection, their retirement plans could be derailed. That’s why, instead of being an afterthought, Income Protection should form the foundation of any life insurance plan. Not only is it imperative that your clients protect themselves from the immediate effects of not earning an income, but any break in income today would have an enormous impact on their future plans.
1Based on FMI Retirement Calculator. The numbers assume retirement savings of 8% of income, inflation of 6% pa, real investment return of 6% pa, net of fees and tax.
2The South African Savings Institute Dec 2017 SARB Quarterly Bulletin