Protecting their future paydays

By: Clyde Parsons, Chief Innovation Officer, BrightRock

How to help your clients understand some income protection basics

It is a well-known adage in our industry that a client’s ability to earn an income is their greatest asset. But according to the latest South African insurance gap study published by ASISA in 2022, which found a disability insurance gap of around R19 trillion, clients are simply not doing enough to secure their future paydays. To help your clients understand the need for income protection, framing the discussion around the value of every payday and what they can do to keep those paydays coming even if they were to get sick or become disabled, may present a useful entry point for this important discussion.

When it comes to income needs, age matters

Any person who works for a monthly salary and is dependent on that salary needs income protection until they reach retirement age. And young people actually need a lot more disability cover than older people. That’s because the total amount of cover your client needs to protect their remaining pay cheques usually reduces as they age, as they will have fewer and fewer paydays left to protect over time.

The insurance gap study shows that clients tend to be under-insured at younger ages, and over insured at older ages – or to buy down cover as they get nearer to retirement age. That’s because, when they first start out in a career, a client’s need for income protection is typically at its highest because of the dependency on their income for the rest of their working life. As they start to near retirement age, their children will be likely to have left home and their debts will be paid off, and with fewer paydays left to protect, their financial responsibilities will start reducing. Their retirement savings should kick in at retirement age to provide them with an income once they stop working.

A good income protection product will therefore match your clients’ changing needs over time, by offering the following features:

• Track the value of their remaining pay cheques: Typically, this cover will start out fairly high and increase initially to match your increasing financial needs. Then, as your client nears retirement, the cover for their income protection needs will start reducing as they near retirement. There are many products on the market that start off with very low premiums when clients’ financial exposure is at the highest but offer more cover later in life, when they actually need less cover. The structure of these products means that as cover grows, so do their premiums – this could compromise affordability later in life while leaving your client with a cover short-fall today.
• Certainty of pay-out: Clients should know what they will receive when they claim. For example, if it’s a lump sum, clients should have guaranteed certainty around the income they can buy with the lump sum. It’s also vital that clients understand the claims criteria. Will their claim depend on objective clinical criteria or the insurer’s subjective view of whether they can earn an income or not? Will their pay-out be reassessed in the claim, even once permanence has been established? These questions deserve careful consideration to ensure your client knows what they can expect.
• Flexibility is an equally important feature: Because no two individuals’ needs are the same, a needs-matched approach enables clients to change their choice of a lump-sum to a guaranteed recurring income pay-out (or any combination of income and lump-sum) at claims stage, when they know what their prognosis is and what their financial circumstances are. This provides your clients the best of both worlds – an income and a lump-sum benefit in one. The ability to change their cover as their needs change without medical underwriting is also vital. BrightRock offers clients the ability to buy more cover when their needs change or to convert their disability cover to a different benefit, such as life cover or dread disease cover. Because this is free of medical underwriting, clients have certainty of cover, whole of life.

While the insurance industry tends to categorise income protection and capital disability cover as separate benefits, it’s to understand the interplay between the two through a comprehensive approach that takes account of their changing needs. Inefficient traditional product structures mean that clients’ decisions have often been driven by what they can afford, rather than what will best meet their needs. By structuring cover efficiently through a needs-matched approach, which aligns with how clients’ income needs typically change over time, it is possible to offer clients more disability cover for their premium rand, while locking in greater certainty of claim, protecting their future insurability, and offering them the ability to choose the pay-out option that best meets their need at claim stage.