NFB Private Wealth Management - south africans need disability cover

By: Nfb Ec  11-11-2011
Keywords: tax

It is vital that you review the adequacy of your disability cover.

South Africans, unfortunately, live in a very violent society and have one of the highest disability claim statistics. It is therefore vital that our clients review the adequacy of their disability cover. Article written by Emmanuella Fernandes, NFB Gauteng, Paraplanner for the NFB Proficio vol 58

The Life Insurance Industry provides us with two solutions: a) Monthly Income Replacement Cover or b) Lumpsum Disability Cover. In determining a solution your financial planner will compare the appropriateness of these two benefits, taking into account the following:

  • Premium affordability
  • Waiting periods for Income replacement
  • Permanent vs Temporary Disability Cover
  • Industry maximums for Income replacement – limited to 75% of Income
  • Consideration to existing Group Life Benefits
  • Specified occupation
  • Smoker status and other risk factors
  • Own Occupation vs reasonable alternative occupation
  • Comprehensive Disability cover vs Functional Impairment cover

A comprehensive analysis is required to determine the most appropriately tailored solution. The solution normally would include a combination of these two products.

Income Replacement Cover

Clients that are seeking a guaranteed Income solution who don't wish to manage the capital lumpsum will elect the Income Replacement option for all or part of their income needs. Income Replacement benefits are designed to replace any loss of income an individual suffers due to disability such that they are unable to perform their occupation. Income Replacement benefits can be paid for both temporary and permanent disability. It is imperative to ensure that your income is reviewed and that the benefits are regularly updated. Similarly, you need to ensure that an “in claim” escalation is selected on your policy. These payments are guaranteed up until retirement age or your selected term. Certain Life Companies have “top up” products that can increase your benefit to 100% of your salary in the event of permanent disability.

The premiums for Permanent Income Replacement Cover are tax deductible and the Income received will be taxable. Temporary Income Replacement Benefits or Sickness Benefits are usually tax free for a limited period and these premiums are not tax deductible.

Lumpsum Disability Cover

Clients that prefer a lumpsum payment in the event of a disability have the freedom to invest the proceeds to generate an income. The impacts of inflation, the ability to achieve the required return, the capital and market risk of the investment will all have a major impact in determining the adequacy of the required lumpsum amount. Poor investment performance or loss of capital could imply that the income does not increase with inflation, or worse – it could decrease.

The premiums on lumpsum disability cover are not tax deductible and therefore the proceeds are tax free.


Let's take a look at the following Income Replacement Quote

Client   Mr Smith
Age   40
Salary   R80,000 p.m. (before tax)
Insured salary   R60,000 p.m. (75% of salary)
Net Payment after an aver. tax rate of 30%   R42,000 p.m.
Claims escalation   CPI (estimated at 6%)
Term of cover   Age 65
Monthly premium   R1,300 (approximately) Tax deductible

For the same premium of R1,300 p.m. we can purchase a Lumpsum Disability Amount of R4,850,000. This amount would be further reduced if you utilised the after tax premium on the Income replacement product. Should Mr Smith be disabled after one month and the proceeds were invested at a 9% average yield, a monthly income of approximately R22,000 (escalating at 6%) will be generated for a period of 25 years. This illustration assumes a tax efficient investment and therefore a low tax base. Clearly this income would increase should Mr Smith become disabled at a later stage. The suitability of these two products would need to be reviewed by your NFB Financial Advisor in determining your optimal solution.

When the primary need for insurance is to compensate for loss of income, Income Replacement benefits are likely to be the most effective solution. Where the individual requires a cash lump sum, Lump Sum Disability benefits are better suited.

Keywords: tax

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