From minor health ailments to permanent disability to death, we have a number of risk tools at our disposal to provide financial protection to ourselves and our loved ones. Governed by varying pieces of legislation, these products all come at a price, and it’s often difficult to prioritise what cover you need and how much. During tough economic times we may be tempted to reduce or cancel the risk protection we have in place but doing so has longer-term implications in respect of affordability, access and insurability.
PROTECTION IN THE EVENT OF ILL-HEALTH
All medical aids in South Africa are governed in accordance with the Medical Schemes Act 1998 and regulated by the Council for Medical Schemes. A medical aid is essentially a risk pool of members who all contribute towards the fund, and these contributions are pooled and safeguarded for the benefit of all its members. In terms of the Act, medical schemes are operated on a not-for-profit basis which means that all contributions are used to cover the costs of its members’ healthcare, including hospitalisation, treatments and medicines. It is important to note that medical schemes are not insurance products and, as such, member premiums cannot be underwritten in respect of age, health, smoker status and other risk factors. All members, regardless of the unique set of risks that each one might bring to the scheme, are eligible for membership and a medical scheme is not permitted to refuse membership to anyone. However, a medical scheme can impose general waiting periods, condition-specific waiting periods or late joiner penalties in certain legislated circumstances. Waiting periods are effectively a mechanism that protects the other members of the scheme by ensuring that new members cannot join, make large claims and then cancel their membership. Similarly, a condition-specific waiting period – which excludes coverage for a specific pre-existing condition – is designed to ensure that members don’t adversely select against a fund simply because it has a better benefit for that condition. We are fortunate to have a wide range of open medical schemes to choose from, most of which provide an array of plan options that cater for all levels of affordability. Entry level medical aid options are generally in the form of a basic hospital plan which is contracted to a hospital network, and which provides in-hospital cover at 100% of medical aid tariff.
Gap cover is a short-term insurance product available to members of a medical scheme and, as such is governed by the Long- and Short-Term Insurance Acts. Gap cover is designed to cover co-payments and shortfalls incurred while in hospital relating to fees charged by specialists which are in excess of the tariffs paid by medical schemes. Medical schemes currently reimburse doctors and specialists at 100%, 200% and 300% of medical aid tariff depending on your plan option, although the reality is the medical providers can charge up to six times the base tariff – making gap cover an attractive and affordable method of risk protection.
Anyone who is a member of a registered South African medical scheme and who is age 60 years or younger qualifies for gap cover although, generally, most gap cover policies apply waiting periods on joining, including a three month general waiting period and a 12-month waiting period for pre-existing conditions. Different gap cover policies apply difference exclusions which typically include treatment for obesity, cosmetic surgery and specialised dentistry, but it is always best to check the list of exclusions applicable before taking out the policy.
Gap cover premiums range from around R250 upwards depending on what is covered by the policy, making it essential to read the fine print before signing. The more expensive policies will generally offer a broader range of benefits and more comprehensive cover. In addition to funding the medical aid shortfall, gap cover policies can be structured so as to cover certain out-of-hospital procedures, shortfalls on internal prostheses, tooth repairs, casualty costs, and even a contribution to cancer costs. In general, gap cover policies will not cover upgrades to private rooms, medication, external prostheses, cosmetic procedures or external appliances.
Most insurers offer dread disease or severe illness cover either as a stand-alone benefit or as a supplementary benefit on your life policy and, as such, falls within the ambit of the Long-Term Insurance act. In a nutshell, dread disease cover is an insurance benefit that offers a lump sum, tax-free payment in the event that you are diagnosed with a severe illness. Although seemingly simple, dread disease is actually particularly complicated area of insurance and navigating it can be a minefield. This is because all insurers offer a slightly different variation of cover making it difficult to compare apples with apples. For instance, some insurers differentiate their offering by including over 300 illnesses or conditions, while others include intricate methods of calculating disease severity for claims-paying purposes. Some insurers offer more comprehensive cover for certain conditions, e.g. cancer, but may have a more limited list of diseases that they cover. In general, most dread disease policies cover cancer, stroke, heart attacks and coronary artery bypass graft surgery. While often not considered an essential risk tool, dread disease cover can provide financial relief in the event of an illness. Standing alongside your medical aid and gap cover, the benefit can provide much-needed financial assistance in the event of a major illness especially when it comes to funding non-medical costs such as wigs, vehicle and home modification, medical equipment or emergency.
PROTECTION IN THE EVENT OF DISABILITY
Lump sum disability
Also regulated by the Long-Term Insurance Act, lump sum disability cover provides a single capital pay out in the event that you are permanently disabled and is generally used to ensure that you are able to cover your debt in the event that you are permanently disabled. As in the case of dread disease, capital disability can be purchased as a stand alone benefit or linked to your life policy. The proceeds of such a policy can also be used to make lifestyle adjustments or modifications as a result of your disability, and to provide for any retirement funding shortfalls. In general, lump sum disability cover is not used to provide an income – however, if an income protection benefit is not available to you, you may need to consider a capital disability benefit, bearing in mind that this comes with investment, longevity and inflationary risks.
As with dread disease, disability insurance can be a technical minefield as it varies from insurer to insurer and comes in different forms and under different names. Significantly, there is a difference between traditional disability insurance and functional impairment assurance, and these need to be understood before taking out any cover. Whereas traditional disability assurance is based on whether or not you are able to physically work, functional impairment cover is based on the occurrence of a pre-defined event. When selecting appropriate traditional disability cover, your options include ‘own occupation’, ‘own or similar occupation’, and ‘any occupation’ insurance, and you would need to meet the criteria of each definition in order to qualify for a claim. On the other hand, functional impairment benefits are tiered and take into account the importance of the body part you can no longer use, bearing in mind that the impairment must be permanent. To measure functional impairment, consideration is given to your ability to perform daily activities. Generally, a functional impairment policy will pay a percentage of the amount for which you are insured, depending on the severity.
Income protection is a form of disability cover that is essentially a salary protection plan. In the event that you are temporarily or permanently disabled, this cover will provide you with between 75% and 100% of your taxable income. If you are temporarily disabled, you will be generally be covered for a period of up to two years in aggregate, subject to the waiting periods you have selected on your policy. In the case of permanent disability, you will be covered up to your nominated retirement age which is generally age 65. It is important to ensure that your cover is linked to CPI so that your monthly pay out does not lose value over time in real terms. For self-employed people and entrepreneurs, income protection is very important as not going to work generally means loss of earnings.
PROTECTION IN THE EVENT OF DEATH
Life insurance is a way of protecting your loved ones financially if you were to die by securing a lump sum pay out to your beneficiaries. Generally, life cover can be used effectively to ensure that your home loan and other debt can be settled in the event of your passing. Many banks insist that you hold life cover to the value of your bond with the bank as the nominated beneficiary as a means to providing security for your loan. Life insurance can also be used to provide financially for those who rely on your income, such as your spouse, partner and/or children, and provides them with almost immediate access to cash in the event of your death provided that they are correctly nominated as beneficiaries. Even though the proceeds of your life policy are paid out to your nominated beneficiaries, the policy will be deemed property in your deceased estate and therefore subject to estate duty. Life insurance can also be used effectively as an estate planning tool to provide liquidity in your estate. While your estate may be asset-rich, it is also important to ensure that there is sufficient cash in your estate to settle with Sars, settle all liabilities, pay estate duty and executor’s fees, and make cash bequests to your beneficiaries. If there is a liquidity shortfall in your estate, your executor may need to realise some of the assets in the estate which could mean that your heirs are financially compromised.