Permanent Disability – Is Capital Disability cover the only option?

Do you worry about what would happen to you if you were permanently disabled? If you have permanent disability cover in place, probably not. But do you know what kind of permanent cover you have? And the risks involved? To ensure that you have complete cover for a permanent disability, you should have a combination of Capital Disability and Permanent Income Protection in place.

When it comes to cover for a permanent disability, many advisers and their clients follow the traditional route of choosing Capital Disability. This means that, if you are permanently disabled, you will receive a once-off lump sum pay-out. Many people are eager to take a lump sum option as they believe they will need a large amount of capital to cover their post-event expenses. The potential amount received can also seem large on paper.

At FMI, we caution against a ‘one cover for all needs’ insurance. Capital Disability has its place in permanent disability cover, but it does not take into account the short-term stress of efficiently managing a large and sudden capital pay-out that is also supposed to replace long-term income over time. As FMI CEO, Brad Toerien points out, “‘Income Protection’ is so named for a reason. The best way to protect your income – assuming that is your primary goal – is to have a policy that pays out in monthly instalments for the rest of your working life, effectively replacing the income you would have made if you were working”.

Matching the product to your needs

It is important to remember that Capital Disability and Permanent Income Protection both have a place in permanent disability cover. The ideal permanent disability cover solution is a combination of Capital Disability and Permanent Income Protection, rather than solely a choice between the two.

Capital Disability pays out a once-off lump sum amount that should be used to settle outstanding debts, for certain business assurance and investment purposes, and to prepare for major lifestyle changes as a result of disability. It is important to note that Capital Disability only pays out on the establishment of permanent disability, which might take some time

Once received, the cash pay-out from a Capital Disability settlement is not the best choice for replacing future income. The major problem with providing future income cover using a fixed lump sum benefit is uncertainty. “Capital Disability cover is inflexible and clients will need to make key assumptions about the 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 over-insurance when investing in a lump sum policy.

Permanent Income Protection pays out monthly income replacement benefits (regular monthly amounts) and can be used to cover both permanent and longer temporary disabilities. It is specifically designed to match your income over time and offers an option to increase your pay-outs in line with inflation. Not only can it be customised to suit your lifestyle and cash flow requirements, Permanent Income Protection is actually cheaper than Capital Disability in the long run, and the premiums are tax deductible.

Best of both worlds

At FMI, we believe that clients are better served with a holistic income protection plan that includes essential Temporary Income Protection (TIP) – for temporary disability – and a combination of Capital Disability and Permanent Income Protection for permanent disability cover.

“It is important to understand that Capital Disability and Permanent Income Protection are different products with different functions and that they should be used in conjunction as part of a holistic solution rather than as replacements for one another,” concludes Toerien.

Your cover will depend on your needs. To help you restructure your cover if necessary, FMI is waiving standard medical requirements for our Permanent Income Protector until the end of December 2012. Terms and Conditions apply. If you have questions about your current permanent disability cover, contact your Financial Adviser or FMI Client Services on 0860 10 11 19.