In some cases, quite deservedly, life insurance products have been given a bad rap. An upshot of an industry plagued by over-zealous and oft-times perversely incentivised brokers flogging and churning policies despite the absence of proven financial need, the words “life policy” are devoid of deference despite the significant role that appropriate risk cover can play in one’s overall financial portfolio. Burdened by folios of fine print, exhaustive exclusions and sometimes unfathomable underwriting, it is small wonder that a lay person might consider the act of purchasing of life cover overwhelming. In spite of its beleaguered history, risk cover has a pivotal role to play in protecting your wealth and it deserves to be unpacked and understood.
Securing your assets
For a typical family with a bonded home, it makes perfect sense to have sufficient life cover to settle the home loan should one of the family’s breadwinners pass away. For the surviving spouse, being able to pay off the bond will provide enormous financial respite for a family left to survive on a single income or possibly no income at all. While a person is in the wealth-accumulation phase (typically from age 25 to 55 years) life insurance can be used to make financial provision for one’s spouse and children in the absence of other investments or realisable assets. There is no magic number as to how much one’s spouse would need in the event of your death, although a qualified financial planner will be able to assess your spouse’s needs taking factors such as life expectancy, inflation, living standards, health status and special dependents into account. Once a capital lump sum has been calculated, your financial planner will source appropriate cover for your specific needs. Even a cursory glimpse at the insurance market will reveal a multitude of life insurance products which, over the years, have grown both in complexity and maturity. Insurance is now a highly-regulated and intensely complicated area of financial planning where like-product comparisons are almost impossible to perform. One product may have more lenient exclusions, whereas another product may apply stricter underwriting. By way of example, every insurance company has a different set of rules regarding the insurability of people partaking in dangerous activities such as para-gliding and kite-surfing. Similarly, where one life insurer will exclude benefits where pre-existing mental conditions exist, another will provide cover in full. There’s much more to selecting life cover that price-checking, so avoid making the mistake of applying for the cheapest cover.
Protecting your income
While you are working, your greatest asset is your ability to generate an income. Your income not only secures your existing standard of living, but is most likely the primary source of your retirement funding. If your ability to earn is compromised at any stage during your wealth-accumulation phase, both your existing lifestyle and your retirement goals may be severely affected. An income protection benefit is an insurance-based product designed to protect your income should you become permanently or temporarily disabled. In its simplest form, an income protector will pay the insured between 75% and 100% of their monthly income until age 65 years. More intricately, the fullness of cover provided by these products depends on a multitude of factors including the occupation of the insured, the nature and extent of the illness or injury in the context of approved clinical and medical guidelines, the definition of ‘disability’ in the policy contract, together with seemingly endless legalese literature which, if not understood when purchasing the product, can result in severe disappoint and frustration at claims stage.
Financial buffer in hard times
Later on in one’s wealth accumulation stage one would generally have access to invested capital to help tide one through a debilitating illness or accident. On the other hand, while you are still building your wealth, servicing a home loan and paying off vehicles, finding a capital lump sum to help cover the associated costs of disease or disability might be somewhat difficult. Even a comprehensive medical aid can leave one with shortfalls and unfunded medical expenses where doctors have charged in excess of medical aid rates. Severe illness of a breadwinner or primary child carer can necessitate unforeseeable costs such as travel, au pairing and child minders, tutoring, medical co-payments and expensive medical appliances, which is where a person can benefit from having a severe illness benefit in place. Upon diagnosis, the insurer will pay out a lumpsum to the insured, which is wherein the complication lies. Often marketed as a ‘guaranteed’ capital payout, the quantum of payout is in fact allied with the nature, severity and extent of the illness, and payouts occur in line with strict clinical and medical underwriting. The need for a severe illness benefit should never be determined in isolation or purchased out of fear of the dreaded unknown. In determining the need for a severe illness benefit, your financial planner should perform an analysis of your existing medical aid, gap cover and disability benefits together with your current investment portfolio. If your existing portfolio reveals an exposed risk in the event that you were to become critically ill, then your financial planner should source one that is appropriate for your circumstances, giving due deference to the clinical fine print.
When navigating the realm of risk cover, we recommend the following advice:
- Ensure that your financial planner performs an in-depth financial needs analysis which takes into account all aspects of your financial portfolio before recommending financial solutions to you.
- Be cautious of advisors who earn commission and are incentivised on product sales. Seek out qualified, fee-based financial planners who sell advice and not products.
- Review your risk cover portfolio every time your personal circumstances change to ensure that your cover is both relevant and cost-effective.
Refrain from succumbing to fear-based purchases in a stop-gap attempt to allay endless “what-if” scenarios. Examine and understand each product in relation to your overall financial portfolio, and know what function it performs in protecting your wealth. Structuring your risk cover portfolio requires ongoing expert analysis to help you achieve the fine balance between protecting your income and assets on the one hand, whilst growing your long-term wealth on the other. This balance will provide great comfort in knowing that your quantifiable risks are intentionally protected.
Have a super week!