This article was first published in the third quarter 2016 edition of Personal Finance magazine.

 

You can protect yourself and your family against the financial crisis that can result from retrenchment by taking out an insurance policy specifically designed for this type of misfortune.

Retrenchment cover is not widely offered by South African insurers, and the benefit is relatively small, but it can tide you over the months during which you are looking for work or setting up your own business.

Young people in the workplace are more at risk of retrenchment than is generally supposed. Nicholas van der Nest, the director of risk product innovation at Liberty Retail, says Liberty’s 2015 claim statistics show that employees in their 20s and early 30s who are establishing their careers – what Liberty calls “young achievers” – have a high risk of being retrenched. “Young achievers claimed mainly for income protection benefits, with retrenchment the main cause of claim. Of total claims among young achievers, retrenchment claims accounted for 15.9 percent,” he says.

The reason retrenchment cover is not widely offered can be summed up in a word insurers dread: anti-selection. This is the tendency for people to take out insurance only when the probability of loss is high. An example is joining a medical scheme only when you suspect your back is about to give in or, in this case, taking out income protection cover when your company is downsizing and you have a strong suspicion that you’re about to lose your job.

Life assurers that offer retrenchment cover protect themselves from anti-selection by making the cover subject to a number of conditions, as detailed below. They offer it only as a supplementary benefit to disability or life cover – in terms of the Long Term Insurance Act, assurers may not offer retrenchment policies as stand-alone products.

The cover generally provides you with a tax-free monthly income as a percentage of your salary for up to six months. The maximum monthly income benefit most policies offer is R30 000 a month for six months. The common conditions are:

* You must be a salaried employee with a full-time, permanent job. You cannot be an owner of a business, self-employed, a freelancer, or working part-time or on a contractual basis.

* You must have been in employment without interruption for at least two years and in your current job for at least a year.

* The economic sector in which you work may affect your risk profile and hence your premium and/or payout. Old Mutual specifically excludes people who work in certain sectors.

* The cover must have been in place for at least six months before you can claim.

* The cover pays out only if you are involuntarily retrenched as a result of your employer downsizing or facing closure, and only after it has followed a legitimate retrenchment process in terms of the Labour Relations Act. It will not pay out if you take a voluntary retrenchment package, and you cannot have declined a reasonable offer for an alternative job from either the employer that retrenched you or another potential employer. It will also not pay out if you are dismissed because of misconduct.

* There may be a period of up to three months between your final salary and the first month’s income benefit.

* You may be required to provide proof of unemployment each month, through registration with the Unemployment Insurance Fund (UIF) over the six-month period.

* The benefit is not affected by whatever you claim from the UIF and whatever your company pays you as a severance package.

* You can claim more than once on the same policy, provided certain conditions are met.

What about economic upheavals, such as the 2008/9 financial crisis? Would a provider withdraw its retrenchment product if there were large-scale retrenchments across the country?

Jaco Gouws, the head of protection products at Old Mutual, says an assurer might close a product for new business, but if you have a policy in place, it would be obliged to honour the contract.

 

What’s available

The following financial services providers offer retrenchment benefits:

* Frank.net. You qualify for the benefit if you have had income protection for temporary disability for at least six months. Three months after your final salary payment, you receive a portion of your monthly take-home pay (salary less any deductions) for up to six months or until you find a job. You need to provide proof that you are looking for work.

You don’t qualify for cover if you are employed by a family member.

Frank.net’s income protection benefit pays out a maximum of 90 percent of your take-home pay, with a benefit cap of R55 000 a month, and the retrenchment benefit is up to two-thirds of that percentage. The cover is valid until age 65.

* Liberty. Liberty’s Income Protector offers retrenchment cover if you have an income protection policy with comprehensive disability cover. It pays out if you cannot find employment within one month of being without a job. The maximum cover is R30 000 a month. You have to provide proof of unemployment every month, through registration with the UIF. The policy is valid until age 60.

* Old Mutual Greenlight. Gouws says Greenlight retrenchment cover is an ancillary benefit to Greenlight’s Lifestyle Adjustment Cover, which offers life cover, funeral cover, and cover for serious illness and temporary and permanent disability. You must have one of these policies to qualify for the retrenchment benefit.

The policy pays a monthly income for up to six months. The benefit is up to 60 percent of your gross average monthly income, from R3 000 to R30 000 a month, and it is valid until 65 years of age.

It does not cover employees in mining, fishing or construction, or civil servants in municipal, local or national government. It does, however, cover minority shareholders in a private company or close corporation. Gouws says employees who work in the agricultural sector are covered, unless they are seasonal farmworkers.

* Standard Bank Direct Life Insurance Services. The retrenchment benefit is an add-on to this provider’s income protection policy, which covers you for temporary disability.

After having an income protection policy in place for six months, you qualify for the retrenchment benefit, and you won’t be covered for any retrenchment process that begins within these six months. The payouts start three months after you receive your final salary and continue for up to six months or until you start working again. You need to provide proof that you are looking for work.

Standard Bank’s income protection benefit pays out a maximum of 90 percent of your take-home pay, with a benefit cap of R55 000 a month, and the retrenchment benefit is up to two-thirds of that percentage. Cover is valid until age 65.

 

Price of cover

You can expect to pay between R200 and R650 a month on top of your disability or life assurance premiums for retrenchment cover, depending on your level of cover and risk profile.

Gouws says the Old Mutual Greenlight policy offers slightly lower premiums the closer you are to retirement, because with fewer years left to work, the risk of your being retrenched is lower.

 

CREDIT LIFE RETRENCHMENT BENEFIT

Credit life policies, which are issued with home loans, car loans and other credit agreements, cover what you owe the credit provider if you cannot meet your repayments because of disability or death. For example, if you die while owing an amount on your car loan, this type of policy will settle the debt, leaving your estate free of that liability.

Many credit life policies include a retrenchment benefit, so that if you are retrenched, the debt covered by the policy will be settled. The terms and conditions of credit life retrenchment benefits are similar to those of the policies mentioned in the article above.

Credit life insurance has had a bad press recently, with policies that include a retrenchment benefit being sold to pensioners and people who are unemployed. This prompted the Credit Ombud, Nicky Lala-Mohan, to issue a statement warning consumers about the mis-selling of this type of insurance.

“The selling of products such as retrenchment and disability benefits for individuals who are self-employed or pensioners have come under scrutiny, as the consumers are unable to claim these benefits but were required to take out the cover as a condition of the credit agreement. Credit providers that are found to be guilty of this could be ordered to refund the consumers affected, as well as pay a fine,” the ombud’s statement says.

Credit providers may compel you to take out a credit life policy when granting you credit, but you have the right to shop around; you do not have to accept the policy that a credit provider offers you.