The financial planning series: Rolling the dice on your future
Now, this is a story all about how
YOUR life got flipped-turned upside down
And I’d liked to take a minute
Just sit right there
I'll tell you how you could be a bit more prepared
(Borrowed and amended from the lyrics of “Fresh Prince of Bel Air by Will Smith & DJ Jazzy Jeff)
OK, so hear me out, I am not trying to scare you into buying a product. That has never been, nor will it ever be my intention. My job here is to make sure you are informed about the basic types of cover out there, to make sure that you are sure about being inSUREd. No frills, no fuss, no boosters or promos and definitely no programmes to make your cover cheaper.
This article will focus on the long-term insurance cover you can take out, and not short-term which is a whole specialized part of the finance world.
My first bit of advice is to understand the basics of the cover. Don’t get caught out by “if you do x-amount of push-ups and run 3000 Km's a day you will save R3.50 per month on your premium”.
The first thing you need to understand is that this type of risk cover is governed by the Long-Term Insurance Act No. 52 of 1998 (with amendments over the years). The main items to highlight:
- Life cover
- Dreaded disease/severe illness
- Capital disability
- Income protection
So what is life cover?
Well, it’s a very simple product to be honest. It is a policy that is taken out in order to pay a lump sum when the insured person dies. It is there to provide liquidity (available cash) for the estate to pay any costs, liabilities, and taxes, or it could be paid directly to beneficiaries.
There needs to be some form of insurable interest. This means you cannot take life cover over a random person, and either hope that they die, or you take a “hit” out on their lives. I know you may think that I'm joking here, but the term “insurable interest” came about in 1774(ish) when Englishmen would take out life policies on famous people who were ill. They would effectively bet on their lives by paying the premium, and when they died, they collected the insurance payment!
Life cover is there to ensure that those left behind are not……how do I say this.... left behind financially. Many people use this strategy to ensure their kids' education is covered, their spouse can live debt free and that there is a “cushion” to make up for the loss of income they would have provided.
How much is enough?
That depends on your specific requirements, taking your financial requirements of those left behind and your current liabilities. Chat to an independent financial planner and they will set you on the right path.
Points to ponder:
What you need to take into consideration is not being “sold” (yeah, I said it!) life cover that you don’t need. Be careful if you feel like someone is pressuring you into taking out cover. Ask for a calculation on how the life cover amount was attained. Look at increasing existing policies before buying a new policy, and at the same time you should look at what a policy elsewhere would cost. Never cancel an existing policy until your new policy is in full effect. Every new policy comes with underwriting, and a life company could outright say “nope!” or add further exclusions to the policy.
Life cover used correctly forms a vital part of your financial and estate planning.
Dreaded disease/severe illness (same thing different name)
Oooofffff. Now this, and talking about disability, are the hardest topics to talk about to people. It is harder to talk about these topics than it is about life cover. “Why?”, you ask, well talking about life cover means you’re gone forever whilst talking about being sick or being disabled… means possible suffering and pain.
Now this is where this article goes into a personal direction. I am going this route not to get sympathy, but to show you that anyone can get sick.
I was 35 and was diagnosed with an old man's disease. Out of nowhere I had stage 3b colon cancer. Once again, I was 35 at the time. Not 55 or 65, but 35. It shouldn’t be happening to someone so young. That’s a normal thought to have.
The funny thing is, my first thought was “thank God I have cover”. I know it’s a weird thing to think about but knowing that I had policies in place gave me immense relief.
I took out a severe illness policy 10 years prior to being diagnosed. Like you, I took out a policy hoping to never use it. That is how it should be, but sometimes “life happens” and you need to have cover in place.
Severe illness is there to pay you, the survivor, a lump sum depending on the severity of your illness.
A quick example is if you take out R1 000 000 in cover, and the severity of your illness is 75% (typically stage 3), you will receive R750 000. This is a very basic illustration. The insurer will assess each claim to see how much should be paid out to you, and this is common practice in the industry.
There will be waiting periods and possible exclusions, but this is where using a qualified independent financial advisor is key.
Now there is a long list of severe illnesses (like 300 of them), but the most common are:
- Heart attacks
What can you use the payout for? Well, it can assist with subsidizing your treatment costs, giving you some comfort that you can take unpaid leave (if you have no income protection) and finally it can be saved for future expenses.
Points to ponder:
Once again, make sure you are not oversold on this cover. Use an independent financial advisor to calculate roughly what you should have in place.
This cover is treated in pretty much the same fashion as your dreaded illness. It is a lump sum payment paid out to you on a severity basis.
Once again, the life company will assess the disability and reports and tests will be done.
Based on their findings, you may receive the full benefit or a partial amount. There will be waiting periods and possible exclusions, but this is where using a qualified independent financial advisor is key to understanding what cover you are buying and how it operates.
The reason why some people like to take this cover over an income protection policy, is that it is often the cheaper option.
A financial planner can do the calculations required in order to work out the best capital amount required, in order to invest and subside your income in the event of permanent disability.
Points to ponder:
I will sound like a broken record, but make sure you are not oversold on this cover. Use an independent financial advisor to calculate roughly what you should have in place, especially as this could be the course of your income if you are permanently disabled and cannot perform your job.
Now this cover is a little tricky, which is why I saved it for last.
With the other forms of protection, I have mentioned, there is no real maximum that you can insure yourself for. What I mean is that if you wanted to take out life cover for R5 000 000, you could do so if you could afford it. A life insurance company may ask why someone with R10 000 income would like R30 000 000 capital disability or severe illness cover, but you won’t be stopped from trying to obtain that cover.
This changes when Income Protection comes into the picture as you cannot be insured for more than what you earn. This term of not being able to ensure your income for more than what it’s worth is called “betterment”. Furthermore, if you have two policies covering your single income, the life companies will know about it (trust me on this, they will know) and they could average out what they pay you!
Therefore, if you have cover through your employer’s group risk scheme, you will need to be careful when taking out cover in your personal capacity. So speak to your financial planner to make sure you are covered for the perfect amount.
Income protection is meant to cater for your loss in income due to illness or disability. It “kicks in” when you are out of work for longer than your annual and sick leave caters for.
There are, once again, waiting periods before your income starts to pay and there could be exclusions to the policy.
Ps: a waiting period is a time that needs to be met before the benefits of the policy start to pay out. The longer the waiting period, the cheaper the premium. This makes sense as the life company takes the risk on the period it takes you to get better or heal from your temporary disability.
With all cover you need to take into consideration the affordability of the premiums, the cover you receive and how that impacts your ability to save.
When you speak to a financial advisor, be open and honest about the debt and your financial responsibilities. so, they can get the cover you need.
If a policy is too expensive, let the advisor know and don’t just walk away and have no cover or take the policy only to put yourself in a crummy financial position every month.
Some cover is better than no cover.
And lastly, trust your gut when speaking to a financial advisor. Ask questions, interrogate why they have used a specific provider and cover option. Don’t do it in a nasty manner but make them aware you are making a big decision and don’t take it lightly.
(Check out Part I of the financial planning series here: click me!)