Choosing the right waiting period is arguably one of the most important decisions any customer will make when taking out an Income Protection policy. Making the wrong call can leave your clients disappointed and unable to meet their monthly obligations. At FMI we’ve seen how even temporary claims can have long-lasting financial consequences. Take one of our policyholder’s Daniela Leigh, as an example, an estate agent with a 7-day waiting period on her Income Protection policy. Daniela lives bravely with the auto-immune disease, Lupus, which results in periods where she’s too ill to work. She’s had 5 claims with us, a total of 170 day in claim. Had she selected a 30-day waiting period, she would’ve qualified for 2 claims, with only 33 days in claim – a scenario which could’ve had a massive impact on her financially. All this, due to one simple decision around her waiting period.
Alarmingly, more than 60% of our clients have chosen waiting periods of 30 days or longer1. And yet, over half our claims in 2018 lasted less than a month. As an adviser, you have an opportunity to make a real difference by setting the record straight, help your clients understand the importance of choosing the shortest waiting period possible.
We believe there are 4 main reasons why many South African policyholders are unknowingly choosing longer waiting periods, and in most cases unfortunately, to their disadvantage:
- Over-reliance on sick leave: The accepted stance on waiting periods is often, that if you’re employed, a longer waiting period on your Income Protection policy really isn’t an issue because you have sick leave. In fact, so much so that most of the industry only offers 30 day waiting period to salaried workers. The thinking behind this is that the Basic Conditions of Employment Act provides up to 36 days paid sick leave in a 3-year cycle. However, it’s important to understand that there are instances where an employed individual may not always have this safety net. Considering that our average claim duration in 2018 was 54 days, there’s a good possibility that they may use up their sick leave allowance. As an example, hysterectomy is one of our most common reasons for claims among female policyholders. It’s important to consider that on average these clients are unable to work for 6 weeks. This means that any short-term periods of illness within that 3-year cycle will be unpaid or annual leave may need to be used. That’s why we offer and recommend a 15-day waiting period for salaried employees.
- Having rainy-day savings: With 72.5% of household income going to servicing debt2, are your clients really being realistic about saving for the possibility of filling any waiting period gap on their Income Protection policy? And even those who do manage might only have enough in their rainy-day savings to cover for the first claim, but what about the second and the third? Our claims stats show that you are 3 times more likely to claim on your Income Protection policy after your first claim.
- Wanting the cheapest possible premium:In today’s economic climate, many insurers simply want to offer the cheapest possible premiums, often at the expense of and optimal waiting period. A shorter waiting period doesn’t always cost a lot more, however the chance of having a temporary claim is significantly higher. Based on over 20 years of paying claims, 7/10 of our clients will have at least one injury or illness during their working lives that will prevent them from being able to earn an income. And if their waiting periods don’t support their claim period, they are left to deal with their financial consequences of that decision. If price is a challenge, we at FMI allow policyholders to split their cover across waiting periods.
- Not knowing they qualify: Shorter waiting periods are usually advised for business owners, professionals or self-employed individuals because being unable to work can have an immediate financial impact – not only on them, but also on their families, their business and staff. That said, there are many South Africans, such as commission earners and contract workers who could be faced with similar restrictions. In the industry, a 7-day waiting period is usually exclusively available to professionals and certain self-employed occupations. Whilst we at FMI agree that they need a shorter waiting period, we understand that commission earners, contract workers and even business owners who work with their hands (e.g. mechanics, plumbers or electricians) also have this need, which is why we’ve made our 7-day waiting period available to these individuals too.
The issue of waiting periods is a key opportunity for financial advisers to step in and advise their clients of the different options available and potential consequences of their choices.
1FMI Claims Stats 2019
2The South African Savings Institute Dec 2017 SARB Quarterly Bulletin