Lump sum benefits pale in face of income protection

By: Janice Masencamp, Head of Retirement Fund Consulting at NMG Benefits 

Traditionally, South African employers have provided lump sum disability benefits for their employees. If an employee can no longer work, they get paid a lump sum, and both parties go their separate ways. But there’s a better way.

Disability income benefits – or, as it’s more commonly known by consumers, income protection – has grown in popularity with employers over time. While it may be more complex for employers to administer, it’s a far superior product for their people, as it protects their greatest asset: their ability to earn an income.

In simple terms, the disability income benefit covers a portion of an employee’s monthly income – typically 75% of salary – if they can’t work through illness or injury. Without it, an employee would first use up their sick leave and annual leave. If their disability was permanent, they would be paid a lump sum, and they would often cash out their retirement savings as well. A lump sum is effectively paying out the death benefit in advance, with no future savings going to retirement, which could force the employee to seek other income sources.

With the disability income benefit, the employee has an income that increases with inflation, while saving for retirement, until they recover, reach retirement age, or pass away. The disability income benefit is paid even if the illness or disablement is only temporary. It may also cover mental health illnesses like depression and anxiety. 

The other massive benefit of an income benefit is that it effectively insures the employer’s contribution to the retirement fund as well. So, even if they’re no longer able to work, the pension fund contributions are still paid, along with risk benefits like funeral and group life cover. Some insurers have even extended this to include a medical aid waiver, which means there would be a contribution towards the medical aid premium.

For employers to start offering a disability income benefit, they need to start by having a clear disability policy that defines the process they will follow if an employee can’t do their job. Every employer’s needs are different. Some have more regular disability claims, through the nature of their sector and business. Others only want the policy to start paying out after the employee’s annual leave expires.

Either way, education about the disability income benefit is needed all round. It’s one of the few insurance products where you can actually be over insured: even if you have both personal income protection and a disability income benefit through your employer, you’re never going to get paid more than 100% of your income. It’s also important to check that you are not under insured, depending on the salary that is used for the cover.

Ultimately, offering a disability income benefit is an important part of being an employer of choice in today’s competitive talent market. Because it’s a group scheme, everyone is underwritten, which makes it attractive for employees who might not have been able to get cover otherwise. And if an employee moves to an employer who doesn’t offer this benefit, they can convert the policy to an individual policy without additional medical evidence of good health.