A serious disability, be it temporary or permanent, can have serious financial implications for any working person. Lost income, the inability to work, and a drop in quality of life are just some of the harsh realities that you could face without income replacement cover or disability insurance – but which type of insurance is right for you?
Income replacement vs. Disability Insurance
It’s important to understand the difference between these two kinds of disability insurance before you decide which one is right for you. Here are some of the main differences between income replacement and disability insurance.
- Income Replacement Cover is a form of insurance that will pay you a monthly amount equivalent to your last salary, with increases for inflation if you choose the option. This insurance pays out if your disability prevents you from working and performing your normal functions.
- Disability Insurance is a type of policy that pays you out a lump sum if you suffer a permanent disability. The onus is on you to invest this money in order to produce a monthly income.
Which type of insurance is right for you?
Your financial advisor will provide you with in-depth information on the different policies available, but for the moment let’s take a look at the pros and cons of each type of insurance.
Income Replacement Cover
One major advantage of income replacement is that it covers you for short-term disabilities that prevent you from working for a few weeks or months. For example, if you undergo surgery or cancer treatment, many Income Replacement policies will cover you for the income lost during this period. A disability insurance policy would not pay out in this case, because the disability is not permanent.
A disability insurance lump sum can be used to repay fairly large amounts of debt, making this option a good choice for clients who have significant debts outstanding. Income Replacement over pays out monthly, and covers regular expenses but not larger debts.
If you become disabled and receive a lump sum pay-out from your insurer, you’ll need to be quite sure that after paying any debts, your lump sum combined with other investments you may have will be sufficient to replace your current income. It may be wise to take out Income Replacement cover as well as a small disability insurance policy to cover any debts that need to be paid immediately.