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Income protection: Why is it necessary?

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Income protection: Why is it necessary?

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Many people believe that the greatest asset you possess is your ability to earn an income. The reason is that the work you are able to do and the decisions you make regarding your money, career, and investments, etc. determine the amount of income you are able to generate which then determines the lifestyle you are able to have. So, if the ability to earn an income is your greatest asset, then why is it not seen as a priority to protect? Most of us have insurance to protect our cars, so why don’t we protect our income the same way? Think about it like this, if you were to lose your ability to earn, how would your life and the lives of those who depend on you be affected? Although there is no single cut and dry solution to protecting your income, as it depends on your own unique set of circumstances, there are options available to you should you fall victim to the life events described below.

1. Death

The Reason

No one likes to think about death or entertain the possibility of dying. But if you have people who rely on you financially, or have debt that needs servicing (car loan, home loan, credit card debt, etc.) then it is something you do need to plan for. Not planning for your death means you may risk saddling your family with a financial burden should something happen to you.

Your Options

Life cover is taking out insurance on your life so that if you had to unexpectedly die, your beneficiaries would be paid out the value you have specified. It’s quite a crude comparison but let’s pretend that you were a car that got written off. You may never be able to replace that exact same car (with the exact make, model, colour, year, mileage and dings), but with your insurance, you can replace the value of that vehicle. And while life cover will never fix the emotional loss of losing someone, it can provide financial peace of mind.

2. Temporary Disability

The Reason

If you had to become temporarily disabled and no longer able to work for an extended period of time, would you be able to pay your bills? Do you have suitable savings to fall back on? Would you have to drastically change your lifestyle in order to survive? Do you have a plan in place for the people relying on you for income? If you haven’t asked yourself these questions then I recommend you start doing so because you don’t ever want to say “I wish I had…”.

Your Options

A temporary disability policy is possible as an add on to many risk-based products and most life covers include disability cover. Temporary Disability Cover will pay you a salary for a period of a maximum of 24 months whilst you recover and reenter the workforce.

3. Permanent Disability

The Reason

The thing about risk is that you usually don’t think about when you are fine and everything is going well. But, when things go wrong and you don’t have a plan, you will be stuck feeling helpless and full of regret. The fact of the matter is, although we can’t predict the future or what is going to happen to us, we can ensure we are at least a little prepared. If you were involved in a car accident, for example, and became permanently disabled, would you be able to earn what you do now? Would you be able to afford the treatment and lifestyle changes that this disability would require? If you had a family that relies on you, what would happen to them?

Your Options

To cover for permanent disability, there are two options that can either be combined or stand-alone. Firstly, you can cover yourself with a lump sum payment upon disability. This would ideally pay for any alterations in your life to make the situation you find yourself in more bearable. Alternatively, you may choose a cover that pays a monthly income to a maximum percentage of your current gross salary.

4. Dreaded Disease

The Reason

Your health is your wealth, especially if you, as your healthy self, are able to generate an income. But what if this were to suddenly change? A dreaded disease (for example cancer) will not only impede your ability to earn but the treatment could also cost you a pretty penny, especially if you don’t have medical aid or are on a limited plan.

Your Options

Dread disease cover is possible with a lump sum payout. This lump sum payout can be used as required. You may use it to pay off your medical costs, or, alternatively, if medical costs are covered, this money can be reinvested and an income is drawn off of it if needed…

This is an excerpt from SMB Financial Planning. See the full article here. Reposted with permission.

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Sheldon M. Botes

Born and raised in the small town of Pietermaritzburg in the Midlands, currently plying my trade in the Big Smoke, Johannesburg. I am following my dreams of working as a Liberty Financial Planner. It is something that allows me to combine my passion for people and building relationships with numbers and finance. My goal is to better inform people about finance and allow them to pave the way to a better financial future.

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