A sound wealth plan is not built only on investment returns, retirement projections and disciplined monthly contributions. It also depends on continuity – the ability to keep earning, saving, reducing debt, funding dependants and allowing invested capital the time it needs to grow. In our experience, financial plans are seldom derailed because the original calculations were wrong. More often, they come under pressure because life intervenes through illness, disability, premature death, retrenchment, divorce or some other event that disrupts the income on which the plan depends.
While risk cover is viewed by many as a grudge purchase, the truth is that if used correctly, it can be a strategic planning tool that protects the engine of wealth creation – your ability to generate an income. During the accumulation phase, before sufficient capital has been built up, future income is often the most valuable asset on the balance sheet as it is the source from which living expenses are paid, debt is reduced, children are educated, and invested wealth is created. Having said that, keep in mind that the purpose of risk cover is not to make you wealthy, but rather to prevent an unexpected event from destroying the wealth plan you are still in the process of building. As your capital base grows, your need for certain forms of cover may reduce – but until you have accumulated sufficient assets to absorb a major financial shock, the absence of appropriate cover can leave your plan vulnerable.
Naturally, the most obvious risk during the working years is the loss of income as a result of illness or disability. Income protection cover is therefore designed to address this risk by replacing a portion of your income if you are unable to work due to illness or injury. This type of cover is generally occupation-based, which means that the insurer assesses your ability to perform the duties of your specific occupation rather than simply considering whether you are capable of doing any work at all. This distinction is particularly important for professionals, business owners, specialists and those whose earning capacity depends on a particular skill set.
While income protection can provide essential monthly cash flow during a period of disability, it may not be sufficient on its own. If a person becomes permanently disabled and is unable to return to work, the financial plan needs to provide not only for current living expenses, but also for the retirement funding that would otherwise have taken place over the remainder of that person’s working life. This is where lump sum disability cover can be valuable, as it can provide capital to settle debt, fund medical and care-related costs, adapt a home where necessary, and replace the retirement capital that can no longer be accumulated through ongoing earnings.
For this reason, disability cover should not be calculated using an arbitrary multiple of income. It should be determined through proper financial planning that takes into account current assets, liabilities, existing retirement provision, future savings requirements, household expenses, dependants, life expectancy and the intended retirement date. A disability at age 35 has very different planning implications from a disability at age 62, and the level of cover should reflect that reality.
Severe illness cover is another important, but often misunderstood, component of a risk plan. Unlike income protection, which is designed to replace earnings, severe illness cover pays a lump sum on the diagnosis or occurrence of a defined illness or medical event, subject to the policy wording and severity criteria. This cover can be particularly useful where an illness does not result in permanent disability, but still creates significant financial strain – think cancer treatment, cardiac events, strokes and other serious conditions can result in unpaid leave, travel costs, out-of-pocket medical expenses, additional therapies and household disruption. While medical aid and gap cover may assist with treatment costs, they do not necessarily replace lost income or fund the broader financial consequences of serious illness.
Having said that, it’s vital to note that the structure of the cover is therefore just as important as the amount. Income protection, lump sum disability, severe illness cover and life cover each solve a different problem, and holding a large amount of one type of cover does not mean that the overall risk plan is adequate. A young professional with no dependants may have a greater need for income protection and disability cover than life cover, while a couple with young children, a bond and one primary income earner may require substantial life cover to protect the surviving spouse and children. A business owner may need a more nuanced structure that considers personal income, business overheads, suretyships, buy-and-sell arrangements, key person cover and loan accounts.
Life cover remains one of the most effective ways to protect dependants in the event of premature death. Where a spouse, children or other family members rely on your income, the proceeds of a life policy can provide liquidity, settle debt, replace future income, fund education costs and preserve the family’s long-term financial security. However, when it comes to life cover, beneficiary nominations should be made with care and must be aligned with the estate plan as a whole. Although nominating a beneficiary can provide speed and liquidity, bear in mind that the wrong nomination can create unintended consequences, particularly where minor children, trusts, estate liquidity or blended family structures are involved.
Risk cover also has a meaningful role to play when it comes to debt planning, although it is important to regularly review such cover as part of your broader financial strategy. Where debt is significant, the plan should consider what would happen if one spouse dies, becomes disabled or suffers a severe illness. Would the surviving spouse be able to retain the home? Would the bond need to be settled? Would there be sufficient liquidity to cover estate costs, transfer-related expenses, rates, levies, maintenance and ongoing household expenses?
Levels of risk cover generally tend to change over time, meaning that the right amount and type of cover required at age 30 is unlikely to remain appropriate at age 50. As assets grow, debt reduces, children become financially independent, and retirement capital accumulates, some forms of cover may need to be reduced or cancelled. Conversely, marriage, divorce, the birth of a child, the purchase of a property, a new business venture, a change in occupation or a deterioration in health may all trigger the need for a review – and the bottom line is that cover should evolve with the financial plan rather than sit untouched for decades.
From an affordability perspective, note that there is little value in structuring an insurance portfolio that cannot be sustained – and it’s important that premium patterns, escalation rates, benefit terms, waiting periods and expiry ages are all understood upfront. A cheaper policy may not provide the definitions or benefit structure required, while a policy that appears affordable at inception may become increasingly expensive over time. The objective is not to buy the most cover, but to buy the most appropriate cover for risks that cannot otherwise be absorbed.
Ultimately, risk cover should not be viewed separately from wealth creation because it remains one of the foundations on which sustainable wealth is built. Investing requires time, income, discipline and continuity, and insurance exists to protect that continuity when life does not go according to plan. Over time, as capital grows, the objective should be to become less dependent on risk cover and more capable of self-insuring. Until then, appropriate cover provides the financial scaffolding that allows the wealth plan to remain standing while it is still under construction.
Have a wonderful day.
Sue
