Income Protection vs. Lump-sum Disability
14 July 2015
There is an ongoing debate about whether a client’s needs would be best served with income protection
benefits or lump-sum disability benefits. The vast differences between the two types of benefit only
serves to complicate the matters further and it is often a topic of great discussion.
What is the purpose of income protection?
At PPS our philosophy is that the PPS Sickness and Permanent Incapacity benefit (income protection
type benefit) is meant to replace or supplement the member’s income due to the loss of earning ability.
This is a monthly benefit that pays out on the inability to perform the usual professional duties of the
member. In other words, if the member cannot do the duties expected in his specific occupation, the
PPS benefits cover the loss of earning ability due to the condition. Our focus is not merely on the
“deficit” created by the condition but rather the impact of the condition on the member’s usual
professional duties (leading to decreased earnings) and impact of the condition on the member’s
potential to generate earnings. The benefit covers short-term sicknesses as well as permanent
incapacity.
What is the purpose of lump-sum disability cover?
At PPS our philosophy is that the Professional Disability Provider (lump- sum disability benefits) is meant
to assist with the funding necessary to make property adaptations (for example modifying a vehicle or
house), workplace adaptations (for example workstation set-up changes), acquiring of assistive devices
(for example a wheelchair) or settling debt to ensure that the member may remain independent and still
enjoy the use of his possessions. This is a lump-sum benefit that pays out on occupational disability due
to permanent conditions. In other words, should the member suffer from a permanent condition that
causes a permanent, significant and severe occupational disability based on the member’s skills or
expertise, the cover amount will pay out once to compensate. After payment it is the member’s
responsibility to manage the funds accordingly.
Which provides better value for money?
Due to the nature of the products we believe that if the need is to supplement or replace income, an
income protection benefit will provide better value for money even though it appears more expensive.
This is due to the nature of the benefit / need it is meant to provide for, namely a monthly payment to
replace income. If income protection benefits are not affordable, then only do we feel that a lump-sum
disability benefit provides value for money as it still provides the opportunity to replace income due to
disability, taking into account the inherent dangers of personally managing the funds and the fact that a
large sum insured is likely required should it be meant to replace income.
If the need is to have a large capital injection lump-sum disability benefits definitely offer better value
for money.
Which provides greater security?
If the need is to supplement or replace income, an income protection benefit provides far greater
security as it ensures a fixed monthly payment for the duration of the working life of the insured. A
lump-sum disability benefit pays out a once-off capital amount that needs to be properly managed to
ensure that the capital lasts for the required time. The money should be invested in a conservative
enough way to allow regular withdrawals and yet grow at least with inflation after expenses and tax.
Should the insured however need a large capital injection on disability; a lump-sum disability benefit will
provide such an amount.
What are the considerations for income protection vs. lump-sum? What is ideal in which
circumstances and for what type of client?
At PPS we believe that income protection benefits are always the preferred benefit if the need is to
replace income as that is what it is designed for. They offer a monthly payment for the remainder of a
member’s working life, increased yearly to keep up with inflation. The risk in managing the capital lies
with the insurer, the policyholder simply receives his “monthly salary” from the insurer.
Only if the member truly cannot afford these benefits should lump-sum disability benefits be considered
to replace income. The PPS Sickness and Permanent Incapacity benefits already cover a member’s usual
professional duties so should affordability play a role, it is not necessary to have the Occupation Specific
Rider Benefit to ensure a member’s own occupation is covered, our “core” Sickness and Permanent
Incapacity benefits already covers that.
An important consideration applicable when lump-sum disability benefits are used for income
protection purposes is the fact that the risks associated with managing the money and ensuring the
capital lasts for the required term lies with the insured and the intermediary. Incorrect management of
the funds, even if completely by accident without any malicious intent, could lead to dire consequences
later in the insured’s life. Taking a sufficient cover amount under a lump sum disability benefit is also a
consideration. R1 million may sound like a lot of money, but if this is to replace income for 30 years, it is
unlikely to be sufficient.
If the need is to receive a lump sum of money to cover large capital expenses (for example providing for
costs associated with the modification of a house and practice to ensure it is accessible with a
wheelchair or settling debt), a lump-sum disability benefit is more suited.
At PPS we believe that the second outcome from Treating Customers Fairly plays an important role
when considering what type of benefit to provide a client. The outcome states that: “Products &
services marketed and sold in the retail market are designed to meet the needs of identified customer
groups and are targeted accordingly”. If the customer group’s need is to replace income, the correct
product to target that need is an income protection benefit as it is designed to meet that need.
As a final note, the concept of aggregation is often forgotten. At PPS we do not apply the principle of
aggregation and would thus never reduce the pay-out due to any income received or other insurance
pay-outs (be it monthly or lump-sum) received. Aggregation may however be applied in the industry, be
it based on income or between different types of insurance benefits paying out due to the same claim
condition.
Article by: Francis Aldrich