At Southwood Financial Planning we have always believed that monthly income protection benefits as opposed to lump sum disability benefits are the preferred “disability” benefit.
Only if a client truly cannot afford income protection benefits or if a lump sum is required to, for example, pay off large debts, should a lump sum benefit be considered.
Francis Aldrich, a product specialist with PPS supports this view and gives additional information on the debate below.
What is the purpose of income protection?
At PPS our philosophy is that the PPS Sickness and Permanent Incapacity benefit (income protection type benefit) is meant to replace or supplement the member’s income due to the loss of earning ability. This is a monthly benefit that pays out on the inability to perform the usual professional duties of the member. In other words, if the member cannot do the duties expected in his specific occupation, the PPS benefits cover the loss of earning ability due to the condition. Our focus is not merely on the “deficit” created by the condition but rather the impact of the condition on the member’s usual professional duties (leading to decreased earnings) and impact of the condition on the member’s potential to generate earnings. The benefit covers short-term sicknesses as well as permanent incapacity.
What is the purpose of lump-sum disability cover?
At PPS our philosophy is that the Professional Disability Provider (lump- sum disability benefits) is meant to assist with the funding necessary to:
- make property adaptations, for example modifying a vehicle or house
- workplace adaptations, for example workstation set-up changes
- acquiring of assistive devices, for example a wheelchair
- settling debt to ensure that the member may remain independent and still enjoy the use of his possessions.
This is a lump-sum benefit that pays out on occupational disability due to permanent conditions. In other words, should the member suffer from a permanent condition that causes a permanent, significant and severe occupational disability based on the member’s skills or expertise, the cover amount will pay out once to compensate. After payment it is the member’s responsibility to manage the funds accordingly.
Which provides better value for money?
Due to the nature of the products we believe that if the need is to supplement or replace income, an income protection benefit will provide better value for money even though it appears more expensive. This is due to the nature of the benefit / need it is meant to provide for, namely a monthly payment to replace income. If income protection benefits are not affordable, then only do we feel that a lump-sum disability benefit provides value for money as it still provides the opportunity to replace income due to disability, taking into account the inherent dangers of personally managing the funds and the fact that a large sum insured is likely required should it be meant to replace income.
If the need is to have a large capital injection lump-sum, then disability benefits definitely offer better value for money.
Which provides greater security?
If the need is to supplement or replace income, an income protection benefit provides far greater security as it ensures a fixed monthly payment for the duration of the working life of the insured. A lump-sum disability benefit pays out a once-off capital amount that needs to be properly managed to ensure that the capital lasts for the required time. The money should be invested in a conservative enough way to allow regular withdrawals and yet grow at least with inflation after expenses and tax.
Should the insured however need a large capital injection on disability; a lump-sum disability benefit will provide such an amount.
What are the considerations for income protection vs. lump-sum? What is ideal in which circumstances and for what type of client?
At PPS we believe that income protection benefits are always the preferred benefit if the need is to replace income as that is what it is designed for. They offer a monthly payment for the remainder of a member’s working life, increased yearly to keep up with inflation. The risk in managing the capital lies with the insurer, the policyholder simply receives his “monthly salary” from the insurer.
Only if the member truly cannot afford these benefits should lump-sum disability benefits be considered to replace income. The PPS Sickness and Permanent Incapacity benefits already cover a member’s usual professional duties so should affordability play a role, it is not necessary to have the Occupation Specific Rider Benefit to ensure a member’s own occupation is covered, our “core” Sickness and Permanent Incapacity benefits already covers that.
An important consideration applicable when lump-sum disability benefits are used for income protection purposes is the fact that the risks associated with managing the money and ensuring the capital lasts for the required term lies with the insured and the intermediary. Incorrect management of the funds, even if completely by accident without any malicious intent, could lead to dire consequences later in the insured’s life. Taking a sufficient cover amount under a lump sum disability benefit is also a consideration. R1 million may sound like a lot of money, but if this is to replace income for 30 years, it is unlikely to be sufficient.
If the need is to receive a lump sum of money to cover large capital expenses (for example providing for costs associated with the modification of a house and practice to ensure it is accessible with a wheelchair or settling debt), a lump-sum disability benefit is more appropriate.
At Southwood Financial Planning as well as at the providers we utilise to provide risk benefits, we believe that the second outcome from Treating Customers Fairly plays an important role when considering what type of benefit to provide a client. The outcome states that: “Products & services marketed and sold in the retail market are designed to meet the needs of identified customer groups and are targeted accordingly”. Therefore, if the customer needs to replace income, the correct product to target that need is an income protection benefit because it is designed to meet that need.