It Pays to Have a Policy with Flexible Benefits
Gauteng, South Africa -- (SBWire) -- 12/14/2012 --If you are permanently disabled, you will probably face a choice in how you want to be paid a benefit.
Schalk Malan, executive director: product at life assurer BrightRock says there are two main ways disability benefits are paid.
- Capital (Lump sum). You are paid a lump sum, which you must invest to provide an income.
- Income. You are paid out a monthly income. If your disability or income protection scheme is attached to a retirement fund (a group life and disability benefit), the amount will be paid until you become entitled to receive a pension.
Malan says both traditional disability and impairment lump-sum and income benefits may be affected by a number of factors.
- Temporary payment. Payments may be temporary, and the assurance company my require you to undergo rehabilitation to get you back to work.
- Delay before initial payment. In most cases, there is a delay, ranging from a week to a few months, before you are paid the benefit. If you are employed, you need to investigate your paid sick leave entitlement, which may cover the waiting period.
You may need to consider buying a policy that will pay for severe illness on diagnosis without waiting periods that could exceed the remaining days of your life.
- Scaled payment. Most policies have various permutations of payment. For example, you are paid 100 percent of your income for the first two or three years, and then 75 percent of your income for all subsequent years.
- Inflation-related payment. Your payments normally increase at a preselected rate. Malan says there is an on-going debate on whether it is best to select a capital lump sum payout or recurring payout on a permanent disability product.
He emphasizes that it is not an either-or debate. There is also a choice offered by some life assurance companies where you can take payment partly as a lump and partly as on-going income. Malan says in deciding what options to take you need to ask yourself what the intent is of your disability cover.
- Will the benefit be used to protect your future earnings or expenses following your disability?
- Will the benefit be required for lifestyle adaptations such as having your home or motor vehicle altered if you have lost the use of your legs?
- Will the benefit be used to settle a debt if you are disabled? Malan says you don’t want to worry about debt if you suffer a permanent disability, especially if your ability to earn and income is affected.
Malan says in South Africa most consumer are under-insured (see “Mind the gap”). If you are one of the millions of South Africans who cannot afford to insure your full earnings in the event of a permanent disability, a good starting point would be first to look at protect your future expenses (after settling your debts), such as;
- Healthcare expenses (medical scheme contributions and recurring expenses not covered by the scheme);
- Children’s expenses (education costs, as well as their living costs); and
- Other household expenses.
Malan says these recurring expenses can be plotted on a graph illustrating your future needs.
In calculating your future expenses you also need to take account of inflation. This means you would need to increase the required amount each year by inflation. This is not a single figure. Your medical expenses would generally grow by more than the average inflation rate each year.
The expenses of, for example, your children might require cover only until they are finished with their studies; other expenses might require cover until your death or retirement.
Malan says the decision on whether to select a lump sum or recurring income payment on disability is difficult, with advantages and disadvantages for both
Lump sum advantages:
- A lump sum allows you to invest for an income, settle debt, pay additional medical expenses and even for alterations to your home if physically disabled.
- A lump sum invested to give you income may not be sufficient if you have a longer life expectancy prognosis, particularly if your injury is, say, the loss of a hand, impacting on your ability to work in your current field of expertise or even another field.
Lump sum disadvantages:
- Recurring benefit disadvantages:
- The lump sum could be badly invested and managed or spent too quickly on things like a new car.
- You can receive a higher income flow in the event of a short life expectancy prognosis because of a terminal disease. This is particularly relevant if you are under-insured in the event of your death.
- It is typically more difficult to match an income from a capital amount than from a recurring benefit.
Recurring benefit advantages:
- Income provision will provide great peace of mind because it removes the risk of your capital running out due to poor investment returns or longevity.
- The premium for recurring income cover is normally cheaper than lump-sum cover because payment is delayed.
- Could provide you with poor value in the event of early death following the disability.
Malan says you need to consider disability assurance that offers you the best of both capital and recurring benefits for your income needs.
This should include being able to select your disability cover to pay out as a lump sum when you take out the policy but being able to change your mind at the claim stage to convert to a recurring benefit.
BrightRock was started with the goal of creating insurance products that truly meets consumers’ and financial advisers’ needs. It offers truly individualised life insurance cover that’s built around your specific needs at the outset, and is specially designed to change with you as your needs change. And because BrightRock’s cover is flexible and changes appropriately when your needs change, it’s more efficient. This means both your cover and your premiums remain relevant, and more affordable, throughout your life. BrightRock (Pty) Ltd is an authorised financial services provider, underwritten by Lombard Life Ltd.
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