In Income Protection -the small print, we highlighted some of the things to consider when buying an income protection policy. In this article, we discuss getting an income protection policy in your own capacity. Particularly if the company you work for already provides this benefit.
First of all, we would like to say that your health is one of your most important assets. If you became too ill to work, it would have a big impact on your life and the life of your dependents. If your employer does not provide such a policy as part of your benefits, we encourage you to think of getting one.
Secondly, if you know about income protection policies, this discussion may seem moot. This is because insurers have a particular clause in their contracts. The clause specifies that if you have more than one income protection policy, then the total payment you would receive upon claiming will not exceed what you were earning before you claimed. Insurers do this to discourage people from committing fraud. If not for this clause, a claimant could end up earning more than they were before they became disabled.
So for many people, having more than one policy would be a waste of money as you would be paying double the premium for the same benefit. However, there are some cases where having a personal policy could be beneficial.
If the policy does not replace your gross salary it may be beneficial to get an additional policy. The income replacement ratio for these policies is usually around 75%. However, this replacement ratio may be lower as the salary used to calculate the benefit may not be your total cost to company. Companies may exclude things such as retirement contributions or medical aid premiums to make the policy cheaper.
If you were to claim, you will still need to pay for these expenses, but the income you will be receiving will be lower. Depending on how big this gap is, it may be beneficial to get an additional policy. To limit the cost, you can set the benefit for your own policy to be the difference between the pay-out from your company’s policy and your gross salary.
Depending on your profession, there may be a discrepancy between the level of disability that will stop you from being able to work, and the level that will trigger a claim on the policy. For example, a pilot can lose their license due to a small physical impairment that does not affect their day to day life. Whilst putting them below the strict health standards required by their profession.
If their policy definition is for example based on their inability to do any job, then they will not be able to claim. If you work in a profession that requires a higher than normal physical fitness level, it may be beneficial for you to get a personal policy that has a claim definition tailored to your profession.
Most policies will pay you a benefit until you reach retirement age. If your policy only pays a benefit for a few years or worse a few months, then it may be beneficial to get a policy in your own capacity.
If your company’s policy only pays for a few months, you may be able to get a personal policy with a waiting period equal to the payment period of your company’s policy. This means your company’s policy will pay your benefit for the first few months and then your personal policy will start paying a benefit from then until your chosen retirement age.
If you are considering leaving your employer and starting your own business, it may be beneficial to take out a personal policy. This is because once you leave the company that benefit will fall away.
The above scenarios are examples of situations where having more than one income protection policy could be beneficial. As always, we encourage you to consult a financial advisor for advice that is tailored to your specific situation.