Before purchasing life cover, it’s essential to clearly understand its purpose within your broader financial plan. To ensure it serves its intended function, life cover must be carefully structured, considering aspects such as ownership, beneficiary designation, premium payments, payment frequency, and coverage amount. This article examines several critical factors to consider when determining the appropriate life insurance coverage for your needs.
The many functions of life cover
Life cover can serve multiple purposes, such as securing your home loan, providing capital for a family member upon your passing, supporting the income needs of your spouse and children, settling unsecured debts within your estate, or ensuring liquidity so that your heirs’ assets don’t need to be sold. However, many overlook the fact that life insurance is primarily an estate planning tool, essential to your estate’s overall structure. The way life cover is structured impacts how the death benefits are taxed, influencing estate liquidity and the financial support provided to loved ones. Therefore, it’s vital to clearly define the role you want life cover to play in your financial portfolio to ensure it meets your estate planning goals effectively.
Quantifying your life cover
Your life cover may be designed to serve multiple purposes, and calculating the correct amount is essential to ensure each purpose is adequately addressed. For instance, when taking out bond cover, the life cover should match the value of your home loan. As the loan reduces over time, it’s important to periodically review your cover to avoid paying for more than needed. Conversely, if you wish to provide income for your spouse, you must determine the required income level, and the duration, and then capitalise that amount, factoring in inflation and investment growth assumptions. As your net worth increases and your reliance on life insurance decreases, it’s vital to review and adjust your cover to ensure it remains appropriate for your changing financial circumstances and goals.
Revealing your health status
When applying for life cover, you’ll be required to complete a detailed health questionnaire, which the insurer uses to assess the risk you present. This information allows underwriters to accurately quantify your risk and adjust your premiums accordingly. It’s crucial to fully disclose any medical or lifestyle conditions that may affect the underwriting decision. Failure to disclose material information may result in lower premiums but can lead to penalties at the claims stage if the insurer discovers the omission. We advise erring on the side of caution by providing as much information as possible, even if you believe it’s irrelevant. Underwriters are experts in determining materiality, so prioritise transparency over withholding details.
Taking your group life cover into account
Group life cover and personal insurance can complement each other, working together to form a comprehensive risk protection strategy that meets all your needs. Typically, group life cover offers more favourable underwriting terms and lower premiums, making it an ideal starting point when developing your risk strategy. However, group life cover is based on a multiple of your annual income (often one, two, or three times), rather than aligning with your actual risk coverage needs. Once you’ve maximised the group life cover available, you can then use personal life insurance to address any shortfalls in your portfolio. Personal life insurance, however, will be subject to individual underwriting, and as a result, the premiums are likely to be higher than those of group cover, which is expected. Combining both types of cover ensures that your risk protection is fully tailored to your personal situation while benefiting from the advantages of group insurance.
Nominating your beneficiaries
Correctly nominating your beneficiaries is a crucial step in structuring your life cover, as incorrect nominations can disrupt your plans and potentially lead to financial consequences. For example, if the purpose of your life insurance is to provide liquidity within your estate, it’s advisable to nominate your estate as the beneficiary, ensuring the policy proceeds are paid directly into your deceased estate. However, be aware that the proceeds of life policies are considered deemed property and will be included in the calculation of estate duty. If your estate’s net value is dutiable, you may need to adjust the level of your life cover to accommodate the additional tax liability.
Alternatively, if your life insurance is intended to financially support your spouse, nominating your spouse as the beneficiary makes sense. Under Section 4(q) of the Estate Duty Act, the value of property passed to a surviving spouse, including life insurance proceeds, is not considered in estate duty calculations. For life cover designated for minor heirs, nominating a testamentary trust as the beneficiary ensures that the funds are not held by the Guardian’s Fund until the heirs reach legal adulthood. Proper beneficiary nomination helps achieve your goals and avoids unnecessary complications during the estate settlement process.
Understanding your premium pattern
When structuring your life cover, it’s important to consider how your premiums will escalate over time, as this can impact future affordability. With an age-rated premium structure, your premiums increase annually, reflecting the growing risk due to your age. These premiums typically start lower but rise steadily over time. Alternatively, a level premium structure remains fixed and is not affected by age. While level premiums may be higher initially, they are likely to become more affordable over time, providing greater stability and ease of budgeting for the long term. Careful consideration of the right premium structure ensures future financial feasibility.
Assessing your need for living benefits
When evaluating life cover, consider your need for living benefits such as income protection, capital disability, and dread disease cover. Insurance is generally more affordable while you are young and healthy, and, if you’re earning an income, income protection is essential. When incorporating life cover and living benefits, remember that you can choose between standalone or accelerated benefits. Accelerated benefits reduce your life cover, as the claim will be deducted from the death benefit. Alternatively, standalone benefits, although more expensive, are separate from life cover and won’t diminish your life cover if you need to make a claim. Consider your needs carefully when structuring your insurance.
Optimising the use of loyalty and rewards programmes
Some life insurance companies offer loyalty and rewards programmes, often at an additional cost. While the benefits may seem appealing, it’s essential to conduct a thorough cost-benefit analysis to determine whether you’re receiving full value. These programmes typically provide significant value only if you are fully engaged, utilising rewards, points, and miles to their full potential. If you don’t regularly participate or take advantage of these features, it’s wise to opt-out and avoid paying for something that won’t benefit you in the long run. Carefully assess whether the extra cost is justified.
In conclusion, selecting the right life cover requires careful thought and planning. Consider factors such as the amount of cover needed, premium structures, living benefits, and the impact of beneficiary nominations. By making informed choices, you can ensure that your life cover aligns with your long-term financial goals and provides security for your loved ones.
Have a great day.
Sue
