Disability cover is typically paid for by way of a monthly premium and it will compensate you financially if you are disabled, either by an accident or illness, and are unable to work or carry out your normal duties.
Disability is defined in different ways and there are two key ways in which benefits can be paid.
How disability is defined
Your disability can be defined in one of three ways:
1. Ability to work
Your disability cover may be defined in terms of what you can or cannot do when it comes to doing your job, or a similar job, and the policy will aim to provide a benefit that serves to replace, or partly replace, your income if a disability leaves you permanently unable to work.
These policies are often said to be occupation-based. Read more When will a disability policy pay out?
2. Your impairment
You can also buy cover that pays out if you suffer from one of a number of listed conditions that results in your body’s structure or functions being permanently impaired to a certain degree, or in you being unable to do certain activities of daily living with no hope of recovering.
This kind of cover can compensate you for the additional costs that come with, for example, the loss of a limb, or organ such as an eye, a mental illness or paraplegia, whether you are working or not and regardless of whether you can continue to work or not.
You may, for example, lose a limb but still be able to do an office job. However, the cost of living with your disability will be ongoing and could involve the need to adapt your home or, your vehicle, buy special equipment or even hire a carer, costs not covered by your medical scheme.
3. As an event
Life insurers also sell event-based disability or personal accident cover. This cover pays a percentage of the sum insured for particular disabilities according to criteria defined in the policy – for example, 50% of the sum assured for the loss of a limb.
If you buy this cover, remember the amount for which you are insured – the sum assured – is the total amount you can claim. So if you are paid out 50% for the loss of a limb, you will have only 50% of the insured amount available for any subsequent claims.
For the most comprehensive cover, look for a policy with benefits based on medically defined impairments as well as disability in terms of an occupational definition - or take out a bit of each type of cover.
The benefits
Disability insurance pays out benefits when you are unable to work or take care of yourself owing to illness or injury, either as:
A once-off sum of money
If your policy pays out a single lump sum it may be referred to as lump sum disability cover or capital disability.
Lump sum disability cover is useful if you need to provide for a specific need should you be disabled. For example, if you want to cover debt or to provide a sum for a child’s tertiary education.
Lump-sum benefits are typically specified when you take out your policy and may grow each year either by inflation or at a rate chosen by you.
The disadvantage of lump sum disability cover is that it only protects you against permanent loss of the ability to do your job and you may be off work for a long time with an illness or injury from which you will recover.
Lump sum benefits paid on impairment policies may be tiered. This means if your impairment is less severe, you will be paid only a percentage of the amount for which you are insured.
Ongoing monthly payments
If it pays out an ongoing monthly income payment, your policy will be referred to as income protection one or as having an income disability benefit.
Ongoing income payments can give you better cover against the loss of your income due to an inability to work, as it is easy to see how the income benefit relates to your earnings and you are guaranteed payments as long as you are unable to work until your retirement age.
However, this is not true for everyone – some self-employed people earning an irregular income may find lump sum benefits more suitable. Be aware that you may be assessed financially for either a lump sum or an income benefit to ensure the amount of cover is reasonable for your situation.
If you are paid out a lump sum, it is your responsibility to invest it to make sure the sum is able to generate an income that increases annually with inflation and supports you until your retirement age when you can use your retirement savings for a pension.
Disability income benefits are typically related to your monthly earnings when you take out your policy, and you need to make sure that the benefits you are entitled to escalate each year.
The policy should also provide for escalation in your income after you are disabled and are claiming the monthly income.
Policies providing income benefits may provide for benefits on both temporary and permanent disability.
Some newer disability policies allow you to select either a lump sum or an ongoing income benefits when you claim. Read more: What is an income protection policy?
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