Income protection policies can protect you from the loss of your income if you are disabled. This means when you take out the cover, the life insurance company needs to know what you earn.
If you earn a salary, your income protection policy should cover your after-tax income. This refers to your income plus any allowances and benefits your employer pays on your behalf, such as your medical scheme and retirement fund contributions, but excludes any bonuses.
If your income protection benefits are provided as part of a group life scheme by your employer-sponsored retirement fund, or through an employer-based insurance scheme, check whether they are based on your pensionable income, which can be lower than your taxable income by 30 percent or more.
If you are self-employed, take care how you define your income. Life insurance companies will expect you to prove the total income you derive from your trading activities, be it in the form of profits paid to you, as the owner, dividend declarations from the company you own or for which you work, or loan account repayments from your business.
If your income fluctuates, the life company will generally average your earnings over the past 12 months.
Make sure you can prove what you earn by showing what you declare for income tax, as when you claim, a life insurer can ask you to prove how much you earn by producing your income tax assessments.
If you have expenses, such as your vehicle costs that are paid through your business, you may need to consider business overheads insurance to cover these costs, and be sure to declare all of them to your life insurer.
Income protection policies in the past have typically allowed you to insure yourself against permanent disability for only 75% of your income.
The thinking behind this was in line with that on providing a retirement income - you would need only 75% of your income in retirement. Disability insurance in effect provides an early retirement due to ill-health.
Life insurers have also been concerned about offering 100% income protection, as more people may be eager to claim for disability benefits and those who have recovered from a disability would have no incentive to return to work.
However, life insurers are increasingly of the view that they can ensure only valid claims are paid based on medical evidence confirming conditions that affect your ability to work, and are less concerned about 100% income protection benefits being an incentive for fraudulent claims.
They are also working with those who are claiming on income policies and have the potential to return to work, to rehabilitate and reintegrate them.
This has resulted in some life companies offering benefits of 100% of income so you are not faced with an immediate drop in income – particularly on temporary disability policies or in cases where there is no possibility of a policyholder recovering from a disability such as paraplegia.
How much income benefit you need will depend on a number of factors such as:
Some life companies have also started offering cover for income you earn from a side-hustle. However, remember that this needs to be income you can prove you are earning and are declaring for tax purposes.
Remember also that you can only insure yourself for your active income that you earn from working. You can't insure yourself against the loss of passive income, such as income from property you rent out, because this income will not be reduced if you are disabled.
Also remember that some life companies aggregate your benefits when you claim. If you have more than one income benefit – for example, one group benefit and one you took out in your own name – some life companies will check to see that you are not claiming more than the income you were earning before you were disabled.
Be sure your income benefit keeps pace with your income
If you take out an income protection policy, you need to ensure that the income benefit you take out increases each year in line with increases in your salary.
You need to set an annual escalation for your income, for both before and after any potential claim. If you do not, the income for which you are insured will be eroded by inflation, and should you need to claim, you will suddenly face a big drop in income.
You may also need to review the amount for which you are insured from time to time, particularly if you are promoted, or your business is growing and your income is increasing by more than the annual increase you set in the policy.
How life insurers treat any request for an ad hoc increase in the income for which you are insured will depend on the terms of your policy.
Some companies allow you to increase the benefit by a certain amount at specific intervals without you being underwritten and facing a new rating for premiums or any exclusions, while others do not.
Some companies recognise that young professionals’ incomes rise rapidly in the early years of their careers and provide for increases beyond the annual escalation.
If your income does not increase in line with the terms of your policy or your income decreases for some reason, be sure to adjust the income benefit for which you are insured, or you may be over-insured.
