Life companies generally try to ensure that you will not be better off financially after you are disabled than you were before, and, if there is a chance of returning to work, that you are motivated to do so. They want to avoid opportunistic claims. For this reason, life companies have rules on how much disability assurance you can take out, particularly when it comes to income benefits.
Life assurers belonging to the former Life Offices’ Association used to abide by a rule that a payout should equal 75 percent of income, but they are no longer required to do so, and you may find that the rule is used in some cases but not in others.
The recent tax changes have added to the confusion.
Hesta van der Westhuizen, a financial planner at Consolidated Financial Planning, says some life assurers limit income protection benefits taken out since the tax change to 75 percent of your gross income (even if your tax rate is less than 26 percent), while others are limiting new benefits to 75 percent of your net-of-tax income.
Van der Westhuizen says some product providers are prepared to insure you for up to 100 percent of your cost-to-company package for sickness or temporary disability, but only 75 percent of this amount for permanent disability.
Others will increase your cover to 100 percent of your income in the event of permanent disability but limit your temporary income disability benefit to either 75 percent of your income or your current income less tax, Van der Westhuizen says.
When it comes to income protection benefits that were in place before the tax change, Van der Westhuizen says most life assurers won’t change your existing benefits if you are overinsured, but in the event of disability, they may limit your claim to what you were earning after tax before you were disabled. This means you may be paying for a benefit you cannot use, Van der Westhuizen says.
Lump-sum cover can be taken out in conjunction with income protection, and you can use a lump-sum payout to provide an income, or top it up, if you are disabled.
Nicholas van der Nest, the director of risk product innovation at Liberty, says if you take out disability cover now (since the tax changes), you can insure 100 percent of your income, but there are rules about the total amount of lump-sum and income cover you are allowed to buy.