Income Protection vs Lump Sum Disability Cover

Income Protection vs Lump Sum Disability Cover
Deon Theunis (Head of Distribution Support - Sanlam), Cover May 09, 2017

Income Protection versus Lump Sum Disability Cover

   
Income Protection and Lump Sum benefits are aimed at satisfying different client needs and a lump sum disability benefit, specifically, should therefore never be used in isolation to cover an income need. Here, a perspective and unpacks key differences between these two products:

Protecting a client’s earning is a critical component of a comprehensive financial plan – irrespective of whether they are formally or self-employed. This will help ensure financial security and peace of mind after a temporary and/or permanent disability event.

But how do you decide what type of disability cover to recommend to a client?

While disability cover is typically available in the form of an income and/or a lump sum, there is evidence to suggest that the actual need for disability cover has been grossly under-insured and sales are also overly skewed towards lump sum disability benefits.
 
The typical characteristics of lump sum disability and income protection benefits can be categorized as follows:
 Disability Insurance Cover and Income Protection Benefits
   
Considerations in recommending lump sum disability benefits
There are a number of challenges that need to be considered in the area of lump sum disability benefits, and this includes the fact that permanence must be established: No lump sum disability benefit will be paid until the life insurer is satisfied that the condition is permanent.

Then there is the issue of managing the lump sum. Here, expertise is needed to invest a lump sum to provide the benefit over the remaining lifetime of the client and this usually comes at a cost.

The issue of under-insurance should also not be missed, as reducing the cover to make the payment amount more affordable, often leads to a client being under-insured.

Managing client expectations is critical in a lump sum benefits environment, as clients often do not understand the claims criteria and might want to claim for temporary disability conditions or conditions that do not satisfy the lump sum disability definition.
 
Income protection considerations
 
  • Position this against the features of an income protection benefit, which allows debt obligations to be serviced, thereby indirectly protecting a client’s credit rating.
  • Other important benefits related to income protection include the fact that a person’s standard of living can be maintained – not least because income can be inflation-proofed.
  • Income, therefore, may often present itself as a better match to the client’s needs given that there is protection against both temporary and permanent disability. In addition, the longevity risk is not passed on to the client but retained by the life insurer.
The ideal scenario requires a combined approach. Lump sum disability cover on its own may not comprehensively satisfy a person’s income protection need and may leave a client exposed. A better combination is an income solution as the foundation, together with a lump sum benefit.

An income protection benefit, together with a lump sum disability benefit, offers a client value for money, comprehensive cover and great peace of mind.

Importantly, proper financial planning will help to ring-fence a client and establish exact needs.
 
Credit To:  Theunis, D.  (2016, November 01).  Income Protection versus Lump Sum Disability Cover.  Cover.   Retrieved from: https://www.cover.co.za/income-protection-versus-lump-sum-disability-cover/
Insurance News  
Refer to the  Disability Insurance  article
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