Is it worth having income protection insurance?

We go through life hoping for the best. We plan for the future. We go to work to offer our families the best possible life. We save, hoping to take the family on that magical holiday they dream about. Sometimes, though, fate intervenes, and the best laid plans are turned upside down. That's when income protection insurance matters.

Insurance is about providing everyday certainty. Anyone can be retrenched, fall ill or become disabled – 3 events that could rob you of the potential to earn money. They're terrible scenarios to consider, but you can guard against them by getting income protection insurance. It could be the best financial decision you’ll ever make. Income protection ensures that you still get a regular income if the worst comes to the worst. It helps you maintain your standard of living until you find another job – or you can retire with access to your retirement money.

What is income protection?

Simply put, income protection is a long-term insurance policy that replaces or supplements your income if you are retrenched, get a critical illness or become disabled so that you cannot earn a living for a while, or  permanently. Income protection is a safety net during difficult times.

What does it cover?

  • Income replacement after retrenchment: This covers lost income after retrenchment, usually for 6 months, although some policies will extend that benefit to 12 months. The purpose is to bridge your income until you can get another job.
  • Dread disease or disability: Cover for dread disease or disability should continue for as long as the condition persists, or until retirement age.

Note: Not all policies cover retrenchment or job loss, so check this before you commit.

Do you need it?

If you're young, healthy and employed, income protection might seem unnecessary. But with high unemployment rates and the high-risk business environment caused by the disruptions of the Covid-19 pandemic, job security is no longer guaranteed.

Anything can happen, and if you lose your income, you still need to pay your bills. If it happens that you fall ill and your sick leave is depleted or doesn’t cover long-term illness, income protection fills that gap too. You may think that you would be able to survive on your Unemployment Insurance Fund (UIF) income, but this process can take long, and you can claim only a limited percentage of your income. Make sure you understand what UIF covers. Based on this, you can decide if you need income protection or if UIF will provide enough cover.

Job security during these difficult times is no longer a certainty. Make sure that you’re covered if something should happen to your income

You should consider income protection if:

  • You have debt: if you have loans to repay you should seriously consider getting income protection to ensure that you can still pay your instalments if you lose your income
  • You’re the sole breadwinner: if your family is financially dependent on you and there isn’t an extra income, you’ll need a safety net if you lose your income.

But if you’re self-employed or a freelancer, income protection insurance may not be your best choice. Not all policies will insure self-employed people and freelancers for disability and critical illness - and ‘retrenchment’ isn’t really possible when you work for yourself. If you function as a one-person business whose operations could be shut down by events like the Covid-19 lockdowns, you’d be better off considering business interruption insurance (see below).

How much does it cost?

How much cover will cost will depend on the type of policy you have as well as your specific circumstances. Your income protection premium is based on the following:

  • Your age.
  • Your sex.
  • Your job.
  • The industry in which you work.
  • Your health and family history.
  • Whether you smoke or not.
  • The income amount you want to cover.
  • How long you want the benefits to be paid – for a year, or until age 60, or 65?
  • The benefits you want covered – dread disease and disability, retrenchment or loss of income, or all four?
  • The range of illnesses and injuries that are covered.

Other types of insurance that make sense

Depending on your needs and circumstances, there are other insurance options you might consider.

  • Business Interruption Insurance. If you’re self-employed or a freelancer, you might consider business interruption insurance rather than income protection. This cover protects you when you are forced to close your business by circumstances beyond your control – such as a pandemic lockdown.
  • Life insurance. If you want your family to be protected if you die, life insurance is the best option.
  • Funeral cover. This helps your family to pay for your funeral when you die.
  • Credit insurance. If you lose your income and can no longer pay your debt, credit insurance can help you pay your instalments for a specified period of time.

Job security during these difficult times is no longer a certainty, and you can never be sure that you won’t get into an accident or fall ill, keeping you away from work. Make sure that you’re covered if something should happen to your income.