How much disability cover do you need?

Author: Chaim Shalpid

A client recently asked me how much disability cover was sufficient to cover their needs. There is no standard answer or one-size-fits-all solution to this question, as clients are individuals and their cover is tailored to their personal circumstances.

To answer this question as best as possible, we need to understand the difference between this insurance and another closely associated cover, namely critical illness.

Disability cover pays out if you are no longer able to earn an income, while severe illness cover funds any lifestyle adjustments that may be required following the diagnosis of a critical illness. For example, you may need to build wheelchair ramps around your house or you may need a long-term rehabilitation programme that is not covered by your medical aid.

Disability cover is available both as a lump sum pay-out and in the form of monthly payments through income protection products. It is important to consider whether you will choose one over the other, or a combination of both.

Lump sum disability pays out a single amount in the event that you are permanently unable to work. This amount should be sufficient to fund your lifestyle for the rest of your life, taking into account that you are permanently disabled and unable to work and generate income.

Monthly income products aim to replace your monthly income in the event that you are either temporarily or permanently unable to work. You receive monthly payments that stop once you return to work.

Typically a combination of lump sum as well as income protection benefits is recommended, depending on your personal situation

As a general rule, to calculate the amount of lump sum disability cover needed, we estimate the present value of your future income taking into account interest rates; current debts; other income that will continue after disability, such as rental income; and your household income.

With respect to income protection benefits, the cover amount should equal your monthly salary, which will allow you to maintain your current lifestyle.

Severe illness cover does not necessarily provide you with money to fund the treatment of an illness; that is the purpose of medical insurance. Rather, it aims to fund the changes in your lifestyle that may be required as a result of being diagnosed with an illness.

For example, someone who is diagnosed with breast cancer and undergoes a mastectomy would be covered by their medical aid for the cost of the medical tests, treatment, hospitalisation and other related medical costs. Their severe illness cover would fund the cost of reconstructive surgery and any other lifestyle changes that may occur.

With the summer holidays on the horizon, now is a good time to review your current policy and benefits before wrapping up the year in December and hitting the road for your much-awaited holiday!