The long-term insurance industry can be a minefield of providers, products, salespeople, targets and terminology that can be overwhelming to the layperson. But long-term insurance can play a valuable role in your overall portfolio – provided that it is accurately quantified and appropriately structured. In this article, we provide some guidelines for assessing your need for insurance.
Ask yourself: Do you have secured debt? If so, how much? Do you have credit life insurance on your unsecured debt? Do you have maintenance obligations in terms of a divorce order?
It is important to remember that, in the event of your death, your estate taxes (including any monies owing to SARS) and creditors will be paid first before any assets are distributed to your heirs or beneficiaries. As such, an essential first step is to quantify all the debt that you currently have. Your secured debt will include any debt that is backed by collateral, such as your home loan or vehicle. Unsecured debt will include credit card debt, retail accounts, and overdrafts. Leaving your loved ones burdened with debt can be extremely traumatic, especially if they are placed in a position where they have to realise assets in order for your estate to meet its financial obligations. Knowing how much you owe and to whom is therefore a critical part of your long-term assurance assessment.
Net asset value
Ask yourself: What is your net worth? To what extent are you able to self-insure? Would your dependents continue to live in your current home if you died? If not, to what extent would they downscale the property?
Another important step in the process is to take stock of your assets including the nature and location of each asset, the market value, your intentions for each asset in the event of your death or disability, and the liquidity of each. Having calculated your debt, you will be in a position to understand your net worth and the extent to which you can self-insure against the risk of death, illness or disability, if at all. Understanding what will happen to your assets in the event of your passing will have a direct bearing on the quantum of life cover you need. For instance, your spouse or partner may prefer to downgrade the family home in the event of your death which may free up some capital in your estate. Remember, as you pay off debt and growth your net worth, your need for life insurance may dissipate over time making annual reviews of your life cover an imperative.
Ask yourself: Do you have assets that can be easily liquidated in the event of your death? Will your deceased estate have sufficient liquidity at time of death to cover estate duty and executor’s fees?
Life insurance can play an important role in creating liquidity in your deceased estate and ensuring that the forced sale of assets after your death is avoided – keeping in mind that estate solvency is different from estate liquidity. While your estate may be solvent, the nature of the assets held in your estate may be illiquid which can cause cashflow problems in the event of death. If your executor finds that there is insufficient liquidity in your estate to settle your estate costs and debt, she may need to sell assets which were intended for your heirs in order to offset these costs. As such, your financial advisor should undertake careful estate liquidity calculations and, where necessary, structure life cover to address any shortfalls that exist.
Ask yourself: Do you have a life partner or spouse that you need (or would like) to provide for in the event of your death? Do you have children who are financially dependent on you? Do your parents have enough for their retirement or will they be dependent on you or your estate at some stage in the future?
Life cover can be used effectively to provide financially for your loved ones especially if your policy is correctly structured for these purposes. A significant advantage of using life cover in this way is that the proceeds can be paid directly to your nominated beneficiaries thereby bypassing the estate administration process. In doing so, your loved ones will have almost immediate access to the funds without having to wait for your estate to be wound up. In assessing this need, you will need to take into account those who are currently financially dependent on you, such as a spouse and/or children, and those who could potentially become financially dependent on you in the future, such as your parents. In order to quantify the cover required, you will also need to consider how much you would like to provide, for how long and the effects on inflation on the capitalised amount.
Ask yourself: Are you dependent on your income to cover your living expenses? Are you the sole breadwinner? Do you have a high-risk occupation or engage in high-risk activities?
If you’re dependent on your income to cover your living expenses, disability cover is an essential consideration, specifically if you are single or the sole breadwinner for your household. When determining the type and quantum of disability cover to put in place, scenario planning can be a useful exercise. For instance, if you became permanently disabled today, how much income would you need to protect on a monthly basis? What capital lumpsum would you need to settle debt, make home alterations and/or modify your car? How would you save for your retirement? If you suffered from a temporary disability and were unable to work for a period of two months, would you have sufficient emergency cover to survive off? Allow yourself the freedom to contemplate different scenarios and the financial mechanisms you would like to have in place to ensure that you can survive financially into the future.
Ask yourself: Are you on a comprehensive medical aid plan option? What in-hospital coverage do you enjoy? Do you have a gap cover benefit in place? Are you the sole bread winner?
Assessing one’s need for dread disease cover depends on a range of factors, although keep in mind that there is no rule of thumb. If you have a comprehensive medical aid with good in-hospital benefits and a reputable gap cover policy in place, your risks are certainly lower. However, having some form of dread disease cover in place can provide peace of mind that in the event of a diagnosis you will have access to some funds to help cover costs associated with the treatment and care required.
Ask yourself: Do you have shares in a business? What would happen to the value of your shares in the business in the event of death or disability? Do you have a buy-and-sell agreement and insurance in place for those eventualities? Have you stood surety for your business?
Business assurance is a broad term which covers a range of life cover that can be used to protect the interests of business owners or shareholders, and can include buy-and-sell insurance, key person assurance, and contingent liability cover. If you have shares in a business, it’s important to understand what would happen to your shares in the event of your death or disability, and how best you can use insurance cover to mitigate against these risks. For instance, in the event of your death, while your business partner may have first option to purchase your shares, she may not have the available capital to exercise this right. In such circumstances, buy-and-sell cover – supported by a correctly-structured agreement – can be used as a funding mechanism to ensure that your partner can purchase your shares in the event of your passing. Similarly, if you’ve signed surety for the debt of your business – for instance, to provide start-up capital for the business – you may consider using contingent liability cover to protect the business and your loved ones against the claims of your creditors. This is because contingent liability cover ensures that any outstanding loans can be paid in full, and your deceased estate is absolved from further liability.
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