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The Importance of income protection

The Importance of Income Protection Insurance

When it comes to assets people tend to think of tangible items like a house, but very seldom do they stop to consider their greatest asset, their income earning ability. Your income earning ability will mean more to you than other assets over your lifespan as it will determine your wealth or lack thereof. This is what makes Income Protection such an important aspect of your financial planning. Income protection not only protects your ability to earn an income, but also protects your cash flow which if it were to stop could cripple you financially, especially in the case of business owners, who have overheads to cover. Income Protection as an insurance product is offered by various insurers under different product names, but this article will explain the basics regarding Income Protection and hopefully provide some insight as to why it should be a top priority for any working person. When it comes to Income Protection the various insurers use different terminology and offer various add-on options to their products, but in all cases the following concepts will be applicable: Temporary Income Protection The Temporary Income Protector benefit is payable on a monthly basis in the event of you being unable to perform the duties of your occupation due to an accident or illness. The maximum cover and definitions vary based on insurer. Waiting periods refer to the period for which you have to be booked off from work before being able to claim. The waiting periods applicable to Temporary Income Protection vary based on company, but are generally split as follows:
  • 7 day (self employed individuals/business owners/professionals/commission earners)
  • 14 day
  • Monthly
  • Quarterly
  Temporary Income Protection can generally be specified for a benefit term of 3, 6, 12 or 24 months. Permanent Income Protection The Permanent Income Protector benefit is payable on a monthly basis should the life insured be permanently unable to perform the duties of his or her own or similar occupation due to an accident or illness. The maximum cover and definitions for Permanent Income Protection also vary based on insurer. Waiting periods applicable to Permanent Income Protection also vary based on company, but are generally split as follows:
  • 3 months
  • 6 months
  • 12 months
  • 24 months
  Permanent Income Protection can generally be specified for a benefit term of up to retirement age or whole of life depending on the insurer. These two products should be combined to prevent any shortfalls in your cover. In doing so you can ensure protection in the event of you being unable to perform your regular occupation due to a temporary condition as well as offer you permanent protection in the event of the condition being permanent in nature. Who should consider Income Protection?
  • Working individuals
  • Self employed individuals
  • Company employees who have shortfalls in their risk cover
  Impact of losing your Income Earning Ability Let’s take a look at an example to see what the impact could be of an individual losing their income earning ability: Mrs. Smith is 30 years old and earns a monthly salary of R25 000 per month with annual salary increases of 8% annually. Her intended retirement age is 65. In this case the client will earn in excess of R55 000 000 over her working career. This R55 000 000 will enable her to manage her lifestyle expenses over the term, build up her asset base as well as save for retirement. By looking at these figures it becomes a bit more evident why your income earning ability should be considered to be your greatest asset. In the event of Mrs. Smith being unable to earn an income due to an injury, accident, illness, etc. the R55 000 000 represents the loss that she will face. In addition to this she could also lose some of her existing assets due to inability to make her monthly repayments. Currently the South African government pays a disability grant of R1 140 per month, but in all honesty this will not get most of us very far in terms of meeting monthly expenses. Tax deductibility of Income Protection The above example offers a better perspective on the importance of income protection and it’s for this reason that the South African government actually encourages individuals to secure their income until retirement by allowing you to deduct your contributions to income protection from your annual taxable income. In terms of tax deductibility the full Temporary and Permanent Income Protection portions of the policy would be tax deductible. In the above example the full Temporary and Permanent Income Protection portions of her policy would be deducted from her gross income when determining her tax payable. Her tax liability will then be lower due to the fact that the tax is calculated on a reduced figure. It is important to note that her tax deductible Income Protection contributions are not deducted directly from her tax payable. Image of PSG logo For those of you interested in Income Protection speak to your financial planner for further assistance and financial planning advice or email Raul Jorge.

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