Lump Sum vs Income Protection benefits… know your options

At FMI, we believe your greatest asset is your ability to earn an income and that all life insurance benefits should protect that income asset. Our business’ core passion is around protecting people’s plans and dreams by developing insurance products that provide them with an income if they’re unable to work in the event of injury, illness or death. We believe a combination of income and lump sum benefits makes sense. Use a lump sum to settle any debts and income to cover monthly costs like groceries, education and electricity. This belief is core to everything we do at FMI.

According to the most recent ASISA Gap study, South Africans are still dangerously under-insured with a 63% life cover gap and a 55% disability cover gap.  However, when you look a little deeper, a further problem emerges – the vast majority of disability cover sold are lump sum benefits (recent industry statistics suggest approximately 80%).

Lump sum disability benefits expose policyholders to a number of additional risks:

They typically only protect against permanent disabilities

• FMI’s claims stats show that 7 out of 10 people will experience at least one injury or illness during their working career and importantly only 3% of those are permanent

They do not protect against multiple claims

• Once you’ve claimed for a temporary disability, you are 3 times more likely to claim again, either due to a related illness/injury or deteriorated health.

The risk of managing a large lump sum of money

• While lump sums are great to settle debts or once-off expenses, they should not be used to provide an income. It’s very difficult to accurately determine the amount of lump sum cover an individual requires, given projected inflation, interest rates, investment returns and earnings. In addition to the planning and investment risks, there are a number of other risks associated with a large sum of money – the possibility of the money running out before you or your beneficiary dies, or being tempted to spend your lump sum pay-out on luxuries like expensive holidays or cars, leaving nothing to pay the bills. In summary, income benefits are easier to understand and plan for because they mimic the salary or income stream that you’re trying to replace.

If this is true, then why are lump sum benefits still outselling income benefits?

We believe the primary reason is simply – “that is how it has always been done”.

Historically, insurance providers have offered mainly lump sum benefits, commonly known as the “3 D’s” – Disability, Dread Disease and Death.  While this practice is slowly shifting, for many it remains the default.  As a result of this, many people are not even aware income protection exists.

In addition, there are a number of misconceptions about income protection benefits. They are often perceived as expensive, while in reality income benefits are typically far cheaper than the equivalent lump sum benefit. Secondly, many still believe they are only available for certain professions.  While in the past this may have been true, today, income protection benefits are available to individuals in almost any occupation. In fact, FMI recently introduced Event Based cover which made income protection available to more than 250 additional occupations for the first time.

At the end of the day, whether you are an accountant or oil rig worker, everyone depends on their income. The risk of a temporary illness or injury is very real and for most of us even a temporary break in your income can have permanent financial consequences. 

That’s why everybody should protect their income against any temporary or long-term disability and we believe that income protection should be a key part of every financial plan.