People insure their vehicles, residences and other valuables because they want the assurance that these assets can be replaced in the event of accidents, loss or damage, writes financial planner Pieter Willem Moolman.
However, many of those who do take out insurance overlook one of their most obvious and most valuable assets: their ability to earn an income to provide for themselves and their dependants.
To them, income insurance should be an extremely important consideration. But many are not even sure what income protection is and how it works.
Income protection is exactly what it says. It is a way of protecting one’s income when unforeseen circumstances arise.
It provides a monthly payment to the insured if he or she is unable to work as a result of, for example, illness, injury or an accident.
The payment could amount to as much as 75 per cent of one’s gross income.
This is especially important for sole proprietors (business owners) and professionals such as doctors and dentists.
To them, every day not spent at work results in a direct loss of income. And to make matters worse, their overheads remain the same, irrespective of whether they are at work or not.
If you have an income protection policy there are several things you should make sure of.
Start by checking on the waiting period. This determines how long you have to be unable to work before the insurer starts paying out.
A wide range of waiting periods, ranging from seven days to 24 months, is available on these policies.
The longer the waiting period, the smaller the premium that has to be paid.
If you are self-employed, a seven-day waiting period is recommended. This will provide a payout if you are ill for seven days or longer, effective from day one.
The benefit period is equally important.
It determines how long you will receive payments in the event of a long-term claim. The standard option is up to retirement age (60 or 65 years).
As in all insurance, one must make sure you are adequately covered against loss of income.
When they insure their income, most people forget that they have overheads. For example, a surgeon usually has rental expenses for his practice, as well as administrative staff that must be paid when he or she is ill for, say, three months.
Therefore, more than one’s personal cost of living must be taken into account when determining the amount to be insured.
To cope with illness and disability is hard enough. One should take care not to complicate matters further by having to worry about finances, especially an inadequate income during times such as these.
The bottom line is that all employed or self-employed people must make sure they will be able to cope with the financial demands of everyday life should they lose the ability to generate an income.
Pieter Willem Moolman is the owner of PWM Financial Management in Port Elizabeth. Visit www.pwmfb.co.za or phone 041 582 3034.