For each of us the words “earning ability” will mean something different. Having an earning ability should put you in a position to earn an income, make a living and provide for your family and dependents.
The method of earning will be diverse. Contingent to each person’s own scenario, protecting this ability cannot be universal either.
For some your earning ability will be by way of your qualifications and work experience, and that will provide you with the opportunity to receive a salary. For others it will be through entrepreneurship or business ventures.
It is thus crucial to ask yourself these two questions.
- What is your earning ability and income that you would want to protect?
- What will be the consequences should you lose that ability and income?
For the salary earner, losing your ability to be or stay employed for your occupation will have you lose your salary and benefits. What does this mean when looking at the numbers.
In this scenario we have Daniel, becoming disable at age 32 and he earned a salary of R45,000pm
| Daniel | Age 32 | |
| Salary | R45,000pm | Growth of 6.5% until age 66 |
| Loss of income | R 62,400,000 |
As you can see the accumulated loss is a very high amount, and your earning ability is likely the single largest asset that you need to protect.
For the entrepreneur, it is a bit more complicated, as many business owners don’t always take their full income in the form of a salary. So, for the salary portion of the income the above example will be applicable.
Part of the entrepreneur’s value is locked in the actual business, the growth, profit making ability and the marketable value of your business.
If you are in a partnership or shareholder structure, you would like to translate the current value of your share into a tangible pay-out should you lose your ability to contribute to the business. Your partners would also likely want the same to happen. In a shareholder/ partner relationship it is thus imperative that all parties need to plan towards a clean-cut solution. With a well-structured and managed solution, everyone wins or without it, everyone will lose.
Don’t underestimate the dire consequences when neglecting to protect your earning ability.
Contact us, should you need some guidance.
Jacques Hodsdon – MCom Tax | CA(SA) | CFP ® is a Director of SPI WEALTH. For enquiries contact, jacques@ spiw.co.za or 013 752 6566
