Are you still stuck on lump sum disability?

Experts in the Income Protection space are urging both Financial Advisers and their clients not to rely on Lump Sum (Capital Disability) products to provide a ‘one cover fits all’ disability solution.

Many Advisers implement lump sum pay-out solutions as a default for permanent disability events. They do so because their clients believe that a large amount of capital will cover their immediate post-event expenses but they don’t think about insuring their future income – a primary function of Income Protection.

Lump Sum is not a ‘catch all’ cover
Brad Toerien, FMI’s CEO, cautions against this approach. He warns that Lump Sum solutions do not take into account the short-term stress of efficiently managing a large and sudden capital pay-out. They also cannot fully compensate for the long-term implications of lost income on the client’s financial wellbeing.

Toerien points out that Income Protection is so named for a reason: “The best way to protect your client’s income – assuming that is your primary goal – is to invest in a policy that pays out in monthly instalments until your client’s retirement”.

Matching the product to the need
Although Lump Sum disability products have a role to play in permanent disability solutions, it is crucial that the lump sum payment is utilised for its intended purpose, namely settling outstanding debts, business assurance, making partial contributions towards an investment, and preparing for major lifestyle changes as a result of disability.

When it comes to trying to insure future income using Lump Sum Disability cover, the major concern is uncertainty. “There are so many factors to consider here. Clients will need to make key assumptions about the potential disability period until their retirement, the effect of inflation on their claim pay-outs, and the expected return on initial lump sum investments made,” says Toerien. “Obviously clients are unable to predict if or when they will become disabled and it is therefore difficult to know what period of time would need to be covered until retirement. This might lead to the client being over-insured when investing in a lump sum policy when there are other investment options available that might be more suitable, beneficial, and affordable”.

Why Permanent Income Protection is a better fit in this case
When it comes to insuring future income, Permanent Income Protection is a better fit than Lump Sum Disability cover. Permanent Income Protection pays out monthly income replacement benefits and can be used to cover both permanent and longer duration ‘temporary’ disabilities. It is specifically designed to match the client’s income over time and offers an option to increase pay-outs in line with inflation. Permanent Income Protection offers numerous advantages over Lump Sum Disability cover. It can be customised to sustain your client’s lifestyle and meet their unique cash flow requirements while coming in cheaper than Lump Sum in the long run. An added advantage is that Permanent Income Protection premiums are tax deductible.

A complete Income Protection solution
Lump Sum Disability cover and Permanent Income Protection are different products designed to cater for different needs. They should, therefore, be used in conjunction, not as replacements for each other.

At FMI, we believe that clients are best served with a holistic Income Protection plan that includes Temporary Income Protection – for temporary disability – and a combination of Lump Sum Disability cover and Permanent Income Protection for permanent disability. Drawing on the strength of each of these products, FMI’s approach ensures comprehensive cover for disability in the long term.

Read more about why Permanent Income Protection is a better fit for insuring future income here.

Are you a Financial Adviser? To help you restructure your client’s portfolio, FMI is waiving standard medical requirements for our Permanent Income Protector from October - December 2012. Terms and Conditions apply.