ARE YOUR SELF-EMPLOYED CLIENTS COVERED? ARE YOU?

According to the ABSA Group, South Africa now has 1.2 million self-employed business people, the highest number since 2009. Considering the financial risks faced by self-employed individuals, income protection should be considered must-have insurance…

ABSA’s research shows that 10% of all employed adults in South Africa are currently self-employed. While this is a positive sign of economic growth, these individuals face a number of risks that salaried employees do not. Many small business run on a month-to-month basis in terms of cash flow and self-employed individuals do not have company group schemes to fall back on should they fall ill or be injured. If a self-employed individual were to suffer a disability and be unable to generate an income, this could have serious financial implications for their business and their dependants.

When it comes to disability cover, many clients feel they are covered because they have permanent disability cover in place in the form of a once-off lump sum payment. But is this cover really adequate for the self-employed person looking to protect their income?

Why a temporary disability is a real risk

Our research shows that 7 out of 10 FMI policyholders will experience at least 1 temporary disability in their working lives.  Yet, recent research by True South Actuaries and Consultants shows that, temporary disability in South Africa is noticeably under-insured, with between only 7 and 25% of the need for temporary cover being covered. This leaves a potential 93% cover gap! This situation has serious implications for breadwinners who would face financial difficulties if they are unable to work due to a disability, especially as only 38.6% of credit-active consumers were current with their repayments in 2012.

For FMI’s CEO, Brad Toerien, “the real risk for financial advisers and their self-employed clients lies in frequent temporary interruptions rather than a single long-term disabling event, especially considering that the damage done lies not just in the immediate disruption to cash flow, but in the long-term impact on small business viability.” For the small business owner, temporary disability might mean a critical interruption in cash flow which can lead to the sacrificing of expenditures such as insurance, investment, and medical aid cover which can result in ultimate business failure or future insurability problems.

Temporary interruptions may not have the one-time, big hit impact of a permanent disability but they can have very serious consequences on an individual’s financial portfolio. Toerien notes “at FMI we have a number of examples where temporary disability cover has proved, if not a life-saver then, at the very least, a lifestyle saver – a commission-earning salesman suffering from depression, a fitter and turner with something as simple as a broken finger which prevented him from working, a financial adviser with a debilitating back ailment who couldn’t travel for months… all these individual were supported by their temporary income protection has helped sustain them until they were able to return to work”.

Take another look at your cover

Clients with disability cover in place should consider what that cover is offering them. If they only have permanent disability cover, it will not pay out for temporary disabilities. If they do have some form of temporary cover in place, it might carry a 3-to-6 month waiting period. Considering the frequency and duration of temporary disabilities, this leaves an obvious gap in the financial planning process, especially for clients who do not have paid sick leave to fall back on.

Toerien’s view is that the current industry approach to disability cover is flawed and that is reinforced by most conventional FA tools which are used to simply calculate a client’s disability needs with an emphasis on permanent cover. In addition, “there’s way too much emphasis on lump sum pay-outs policies and not enough on guaranteed monthly payments.”  He believes lump sum policies are seductive to clients because of the size of pay-out but the reality is that such amounts can result in shortfalls if the pay-out is not properly managed and falls prey to inflation and investment risks.

A lump sum policy has a role to play in providing for the immediate demands of a permanent disability – home conversion, big medical bills, staff pay-outs, settling outstanding debts – but future needs should be covered by monthly replacement benefits that will ensure the policyholder’s current income is matched right through to retirement.

The holistic solution is a combination of temporary and permanent disability cover, with temporary cover that truly meets the needs of a self-employed client. For example, BPE’s 7 day waiting period and bi-weekly pay-outs ensure that an individual’s cash flow needs are quickly satisfied.

Self-employed? Choose BPE

At FMI, we specialise in income protection for a wide range of working individuals – from the salaried mechanic to the private practice physician. However, our flagship product, Business Person Elect has been tailored to focus specifically on the needs of the self-employed professional. Find out why by taking a closer look at BPE.

Do your clients already have BPE? As a response to current market needs, we’ve recently enhanced BPE.

For more information on FMI’s product offerings, contact the Financial Adviser Distribution Team on 0860 10 52 08 or [email protected]