This benefit may be purchased to either temporarily waive premiums on a policy or to provide a temporary income in case of retrenchment. Generally, this type of benefit will pay for a specified period, like 12 months.
The benefit becomes payable when the assured has been retrenched as defined by the life company. The exact definition of retrenchment may vary from company to company but is normally defined with reference to the Labour Relations Act’s definition.
Usually a retrenchment benefit ceases at normal retirement age, unless an earlier age is specified.
This type of cover can be bought by people who are employed, but is not available to contract workers, seasonal workers, part-time workers, temporary workers, casual workers or workers whose primary source of income is commission related. It can also not be purchased by self-employed people or directors of companies.
Where retrenchment cover is bought with the aim of providing an income, the premium usually remains level, which means it does not increase unless the cover is increased.
The retrenchment waiver premium is usually calculated as a proportion of the premium being waived. Where this premium increases, the retrenchment waiver premium will therefore be increased at the same rate.
A waiting period would usually apply but these may differ from company to company. For example, if the waiting period is 12 months and the policyholder is retrenched within 12 months of taking out the benefit, then no retrenchment benefit would be payable.
Premiums are, however, payable during the waiting period.
While no medical underwriting applies to retrenchment benefit cover, some employment related questions may be asked.
Proof of retrenchment would be required (e.g. notice of termination from the employer of the policyholder).
These would vary from company to company, but typical exclusions would most likely be applied. For example, policyholders working in certain industries or occupations may be excluded from taking out retrenchment benefit cover. Also, retrenchments as a result of government action or voluntary retrenchments would be excluded.
Reinstatement of the benefit
The waiver benefit may be reinstated in certain cases. This means that policyholders who were retrenched and who received the retrenchment benefit may claim again if they are subsequently retrenched provided their premium payments are up to date. A life company may, however, require a specific period (e.g. 12 months) to pass before another event can be claimed for.
The purpose of this benefit is to provide a lump sum or income benefit in the event of the life assured becoming permanently impaired in accordance with pre-defined criteria.
With traditional disability benefits, a person’s ability to carry on with a current or similar job is a determining factor for the payment of benefits. This is not the case with functional impairment as you are insured against the loss or impairment of a function and not against the inability to continue generating an income.
Details of the product
This benefit is payable in the event of the insured becoming permanently impaired, due to accident or illness, which results in a loss of ability to function.
Either a lump sum or monthly income amount is paid to provide for the costs associated with living with impairment, such as specialised care, equipment or a home nurse. Benefits are 100% of the sum insured for severe impairments and tiered for less severe impairments. It is possible to claim more than once against this cover, although overall claims cannot exceed 100% of the sum insured. As the claim events are not linked to your ability to perform your current job, the benefit provided is not income dependent and is not intended to replace lost income.
The sum insured (total cover) may be increased by means of voluntary premium increases. For example, the policyholder may elect a cover (sum insured) increase of 5%. The premium will then increase annually in order to pay for the annual sum insured increase.
Functional impairment policies can be taken out for a maximum term of 20 years, with an upper age limit of for example 65.
There are several options available to pay for a level sum insured.
Level premiums that stay the same for the duration of the cover.
Compulsory increasing premiums that increase every year without a corresponding increase in the sum insured. This enables the client to pay lower premiums initially, since the premiums due later will be higher than the corresponding level premium. The higher the compulsory increase in premium, the lower the initial premium.
Other increases later, which are priced in after, say, 10 years, or benefits that are only priced for 10 or 15 years. At the end of the 10 or 15 years the benefit is then re-priced and the premium increases.
Premium guarantee terms are available for up to 15 years.
Waiting period: there aren’t any explicit waiting periods but there are implicit waiting periods e.g. some conditions require maximum medical improvement.
The benefit may require the insured to survive for a pre-set period, say 14 days, for the claim to be valid.
Underwriting process is comprehensive and is like that used for dread disease cover sometimes a mixture of disability underwriting is used.
Claims process: claims criteria include functional impairment (FI) definitions and Activities of Daily Living (ADL) criteria. (ADLs measure your ability to perform basic functions such as washing or eating.)
Common exclusions would include self-inflicted injuries and war and riot exclusion clauses. Furthermore, there are also embedded exclusions like low level heart attacks.
This product is especially useful for students or housewives, who wouldn’t qualify for regular disability benefits. It is interesting to note that these lives only make up a small proportion of the sales. In several cases this product is sold instead of an occupation product although that is not the intention of the product.
The product can be accelerator or stand-alone.