A common misconception amongst many people is that lump sum disability insurance and income protection insurance are one and the same thing. Unfortunately comparing them would be like comparing apples with pears. However in no way shape or form does it mean that one is necessarily better or worse than the other. In fact they both have in their own way redeeming qualities with regards to future financial planning.
Did you know? Death is no longer the leading cause of house foreclosure. Believe it or not but nowadays it is disability.
The thought of being permanently disabled or without a monthly income is just as terrifying as the thought of dying. The only thing more terrifying is not having the right type of cover. Not only are the majority of South Africans under insured in general, recent statistics show that the self employment rate in South Africa is at an all time high. Basically what this means is that more and more people are working for themselves. Most of them do not have disability insurance not to mention income protection. Should the unexpected happen those without insurance are in for a rough ride to say the least.
Don’t think for one second that the bank or any other debtors will feel sorry for you should you suddenly lose your income or become disabled. If you dare miss a few instalments they will take your house or car without thinking twice about it.
That being said, it’s time to take a closer look at the two insurances that will make all the difference i.e. income protection insurance and lump sum disability insurance. How do they differ from one another, what are the pros and cons, monthly premiums and ultimately which one is better for you.
Lump sum disability insurance and income protection insurance what is the difference between them?
Lump Sum Disability Insurance
This insurance policy will pay the policy holder a pre determined lump sum in the event of the policy holder becoming permanently disabled. The lump sum payment is a once off payment and it is the responsibility of the policy holder to manage their payout appropriately. In most cases the lump sum is placed in an investment so as to secure a monthly income.
Income protection insurance
This insurance policy has been specifically formulated to provide the policy holder with his/her monthly income, or at least 75% of that monthly income, in the event that the policy holder should become either temporarily or permanently ill or disabled and is unable to work.
What are the pros and cons of each insurance policy?
Lump Sum Disability Insurance
- Pays out the entire pre determined amount as a lump sum.
- Lump sum payout may be used for any number of things i.e. settling outstanding accounts, future medical fees or placed in an investment to provide a monthly income.
- If proper investments are made the lump sum payout may continue to provide for your loved ones in the event of your death.
- Any one 18 years and older may apply.
- The policy holder must be permanently disabled in order to claim.
- The lump sum payout is a once off payout.
- If the lump sum payout is not used wisely the policy holder may run out of money.
- Premiums are not tax deductible.
- There is a waiting period before the policy holder is covered (the waiting period differs from one insurance agency to the next it is important to determine the waiting period from the insurance provider)
- Should the lump sum be invested the policy holder must take inflation into account.
- It is more difficult to claim for permanent disability.
Income Protection Insurance
- The monthly payout will be a maximum of 75% of the policy holders last pay check.
- The premiums are tax deductible.
- The policy keeps up with current inflation.
- Meets the needs of the policy holder.
- The waiting period before the policy holder is covered is approximately three months. What this means is even though the policy holder has paid his/her monthly premiums he /she may not make a valid claim until the waiting period has lapsed.
- Policy holders tend to over insure in hopes of making up the additional 25% shortfall.
- The policy benefits are only available upon loss of income.
- Should the policy holder pass away the income protection policy will cease.
The monthly premiums for either one of these insurance schemes are not set; they vary according to the following aspects:
- The insurance agency that is used.
- The age of the policy holder.
- The type of insurance coverage.
- The insured amount on the policy i.e. the higher the insured amount is the higher the monthly premiums will be.
- For income protection the monthly premiums depend on the waiting period for payouts. These are selected by the policy holder i.e. the longer the waiting period the lower the premiums.
Which insurance policy is best?
The question is not which is best but rather which best suites the needs of an individual, personally I would advice a mixture of both to offer complete protection against every eventuality.
Please keep in mind, more often than not people tend to confuse your every day disability insurance which provides a monthly income with lump sum disability insurance which pays out a pre-determined lump sum. As such it is of the utmost importance that you make sure of the type of disability insurance that you are investing in as well as the terms and conditions related to claims.