Question

I was retrenched and have set up my own business. It occurred to me that I may run into financial trouble if I am ill and cannot work for an extended period. My old employer had a nice benefit that paid me my salary if I could not work for more than 30 days. Am I able to buy this type of benefit as an individual?

Answer

This type of benefit is certainly available to individuals. It is called an income protector. In fact, it is the one risk benefit that I recommend to all my clients who have their own businesses.

The way it works is that, should you be unable to work for a medical reason, the insurance company would pay you an agreed amount of money until you recover or retire. These payments would typically increase each year.

When you are running your own business, your income is very much dependent on your ability to work. If you cannot work, your income will dry up and you could end up in serious financial trouble. This product will ensure that you remain on the same life trajectory that you would have been on had nothing gone wrong.

There are several companies that offer this type of product. I will run through the main issues that you need to look at when choosing this type of product.

Waiting period

This refers to the amount of time that elapses between you becoming ill and the first payment coming from the insurance company. This can range from one week to six months.

The shorter the waiting period, the higher your premiums will be. You will need to choose a timeframe that suits your needs and pocket.

Temporary and permanent cover

There are usually two aspects to this type of cover:

Temporary cover, which is for illnesses and conditions from which you should recover within 24 months. The claims process for a temporary cover event is usually fairly quick.

Permanent cover usually kicks in after 24 months and covers you till you retire. For the permanent claim, there are usually a number of hoops that you have to jump through. This is understandable: the amount of money involved here is surprisingly large. For instance, if you are 35 years old and your business is bringing in R40,000 a month and a permanent claim is paid out on the basis of replacing your income till you retire at the age of 65, these payments would add up to a whopping R41-million (assuming annual income increases of 6.5% a year).

Claim definitions

An area that needs to be understood is what is required for a claim to be admitted. For some companies, all that is required is a note from your doctor confirming a diagnosis and booking you off for a period. If this period is within the norms for that type of ailment, the claim will be approved and your income will start once the waiting period is over.

Other companies have complicated definitions and you may have to prove that you are unable to perform your occupation because of your illness. Some companies have lists of specific impairments and the timeframe for which they will replace your salary.

Occupation changes

Something else you need to look out for is whether you would still be covered should you change occupations. Jobs and businesses evolve over time. You do not want to be in a situation where a claim is repudiated because your job is different from what it initially was when you took out the cover.

Overheads cover

If you have staff working for you or have premises that you’re paying rent on, you should consider including overheads cover. Here, you would increase your sum assured by the cost of these overheads.

There are lots of decisions that you need to make. An experienced broker should be able to guide you to make the right choices.

Running your own business leaves you exposed financially, as most of your income will depend on your ability to earn. If illness or disability prevents you from earning, you could end up in serious difficulties. This risk can be removed by taking out an income protector, which is something that every small business owner should consider.