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When it comes to my investments and life insurance, I often do thought experiments, during which I ask the question: “What would happen if…”
These scenarios are important in understanding whether I have a financial plan that meets my needs.
If, for example, I went for a regular medical checkup and discovered that I had cancer or another chronic illness, what would that mean for me financially? It is a good exercise to do so that one can understand how the various insurances work together.
My critical illness cover would help pay for whatever new and cutting-edge technologies my medical scheme didn’t cover.
My income protection would kick in if I was unable to work for more than a month, and, if I suffered an event that left me permanently disabled, my disability lump sum cover would pay for me to adapt my home and lifestyle, and my income protection would pay until retirement age of 65.
My decision to have a non-accelerated policy (in which my life cover is unaffected if I claim on any disability or illness cover) would mean that, if the worst happened and I did not recover from my illness, my life cover would at least pay out enough to help my husband with the mortgage and our kids’ education.
READ: Life cover boosts medical costs
Putting together the right blend of insurance cover for your needs is important. We should not only be focused on insuring death, because during our working life we are statistically more likely to suffer from an event such as illness or disability. Cover should also change, depending on what stage of your life you’re in.
LIFE STAGE
The best kind of insurance product is one that is flexible and grows as you do. The needs of a 25-year-old are vastly different from those of a 40-year-old, which, in turn, are different from the needs of a 60-year-old. However, you don’t necessarily want to have to take out new insurance policies every time you have a life event.
Many insurance providers offer things such as future cover, for which you pay a small premium today but you are able to significantly increase your insurance cover without underwriting (that is, dealing with medical questions) at a later stage.
Young and single: If you are young with no dependants, your biggest risk is that you are unable to work. At this stage, insurances such as critical illness, disability and income protection are important. You do, however, want to have the ability to take out life cover at a later stage should your situation change. Many insurers offer future cover, which enables you to increase life cover without underwriting.
READ: Your family might not receive your death benefits
House and kids: If you have financial dependants – whether they are your children, parents or a spouse – you need to have life insurance that will provide for them if you die, as well as cover to settle your estate costs. If you buy any asset, be it a house or a car, you will have to take out life insurance to settle the debt in the event of your death, but remember that you have the right to shop around for the best deal.
Kids moving out: As you get older and your children become more independent and your house is paid off, your insurance should change. You have less of a need for life insurance but you are now more likely to face disability or critical illness risks. A good insurance policy is one that allows you to shift some of your premiums away from life cover to boost your cover for higher-risk events.
HOW MUCH DO I NEED?
The best way to assess your needs is to look at what monthly expenses you need to cover and for how long.
A good adviser will approach your insurance needs based on your monthly expenses. Some insurers build this into their quoting system, so, although you are insuring a lump sum, it translates into monthly income.
For example, I calculated how much income would be required each month to provide for my children until they each turn 25. I was then able to purchase cover for this specific need.
This resulted in a significant premium saving, as most insurance policies sold are “for life”, even though you may not need it as your needs change.
WHAT THE JARGON MEANS
DISABILITY COVER:
. Temporary disability cover: This is short-term insurance that pays you an income for a temporary disability. If the disability is permanent, then permanent disability cover will kick in. This can also take the form of income protection cover.
. Permanent disability lump sum cover: A lump sum is paid out to cover once-off expenses such as adjusting your home or car to be disability friendly. This lump sum can also be useful to settle outstanding debts, however, the insurance company first has to ascertain that you have a permanent and not a temporary disability.
. Permanent disability income cover: This pays an income until retirement age if you are no longer able to work. It is important to realise that this does not continue to pay into retirement, so you still need to be saving for retirement.
LIFE COVER:
. Term or whole-of-life: A term policy is for a specific period and may match a specific liability such as your home loan or providing cover for children’s education. This can make cover more cost-effective, as you are only insuring for a specific time frame. Keep in mind that if nothing happens to you, there is no refund once the policy comes to the end of the term.
Whole-of-life is a policy that ends on your death. This could be used to cover estate costs or to leave a legacy. Make sure you can afford to keep up the premium payments in retirement.
Guarantees: This is the length of time your premium is guaranteed for. Insurance companies are allowed to increase premiums above the agreed amount once you are outside of the guaranteed premium period. This could happen if an insurance company needs to re-assess its risk exposure, for example, after a major event such as a pandemic. It is important to compare guarantee periods when comparing insurance quotes.
. Premium pattern: There are different types of premium patterns you can select. An age-rated policy tends to be cheaper, but the premium goes up each year according to your age and may become unaffordable in retirement.
A level premium is more expensive initially, but the premium only rises by an inflation factor each year. The idea is that you pay more when you are younger in order to cross-subsidise the premiums when you are older.
. Escalation: Policies have two types of escalation – premium escalation and claim escalation. Premium escalation is how much your premium goes up by each year and claim escalation is how much your cover increases by each year. This is usually adjusted for inflation. If you have an age-rated policy, your premium will go up each year above inflation, as your risk increases as you get older.
DISABILITY AND CRITICAL ILLNESS COVER
The industry has provided a standardised way for insurers to explain the rate of cover, which helps you compare products.
- Conditions covered: Lower premium products only cover four or five major conditions such as cancer, heart attacks and strokes, while other policies may have “richer” cover that extends to more conditions. If you have a family history of disease, find out whether that disease is included.
- . Severity: Policies pay out differently according to the severity level. For example, some policies will pay out 100% at stage 1 cancer; another policy may only pay out 25% at this stage; while another will only pay out for stage 3 cancer. Some policies pay out disability cover if you lose one arm or one leg, while other policies only pay out if you have lost both limbs.
- . Accelerated cover: Accelerated cover means that your life cover is reduced by the amount you claim from disability or critical illness.
For example, if you had R1 million life cover and R400 000 critical illness cover and were diagnosed with cancer, you would be paid out R400 000 from your critical illness cover.
However, if you subsequently died due to the cancer, your life cover would have been reduced to R600 000. Stand-alone cover is more expensive, but it means that any claims from disability or critical illness will not affect your life cover.
Retrenchment cover: Some policies include retrenchment cover, which means your premiums are covered in the case of a retrenchment.
