What is your biggest asset?
- Your car?
- Your house?
If you guessed correctly not one of these two is your biggest asset. Your biggest asset is your ability to earn an income. A 35 year old woman earning R40 000pm has a future income of R43 000 000. (annual increase of 6.7%)
As a financial planner I often hear people say income protection is too expensive and the chances that I will become disabled are slim to none.
Let’s investigate that statement a little further
Actuarial statistics tell us that a healthy 18 year old non-smoker has a 6% chance of claiming on a comprehensive lump sum disability policy before the age of 65. This includes partial physical impairment claims probability, where a person can lose use of a limb or bodily function that will qualify as a claim.
So the odds of being permanently disabled are not huge by any means, yet it happens to people every day. Do you want to be the person it happens it and not have income protection in place?
What are the odds of becoming temporarily disabled?
7/10 people have at least one temporary disability in their lifetime that will prevent them from earning an income.
You are 3x more likely to claim again after your first claim. This means your risk increases once you have had a claim.
Self-insuring with a rainy day fund instead of income protection is a risky proposition, what happens if you need to claim for a second or third time or your first claim is long and you run out of funds?
Let’s be honest most of us do not have rainy day funds and we do not have enough money saved to not earn an income and still pay our bills for 2- 3 months.
The average claim duration also increases with age.
- Younger than 40 it is 58 days.
- 40 to 59 years it is 103 days.
- Older than 60 it is 116 days.
Once you have had a claim it may be too late to get income protection cover, you may be refused cover due to medical reasons. It is better to get cover before you need to claim.
What is the relative cost of income protection?
- Car insurance for a R260 000 vehicle cost R532pm. (dependant on vehicle make and more factors)
- House insurance for a R1 500 000 house cost R302pm.
- Income protection that covers R40 000pm (adding up to R43 000 000 until age 65) at a premium of R548pm is not expensive at all in comparison. (for a 35 year old female non-smoker on standard rates, inflation in-claim escalation included)
Would you drive your car without insurance?
Probably not, yet in South Africa you are 9x more likely to have a temporary disability income claim than to have your car stolen or hijacked.
When it comes to insurance we as South Africans like to insure all the smaller things, cell phones, laptops and so on. The incidence of loss may be higher but the damage is minimal in the bigger scheme of your life.
When it comes to income protection we are not as well covered. The incidence may be lower than loosing a cell phone but the impact of loosing your ability to earn an income is massive.
Speak to a Certified Financial Planner Professional® today to find out about income protection to match your specific needs.
Statistics provided by FMI.