When it comes to my investments and life insurance, I often do thought experiments. I ask myself the question: “What would happen if…”. Asking these questions is important to help you understand whether you have a financial plan that meets your needs.
For example, what would happen if I went for my regular medical checkup and discovered I had cancer or another chronic illness? What would that mean for me financially? It is a good exercise in understanding how all the various insurances work together.
My critical illness cover would help to pay for whatever new and cutting-edge technologies my medical scheme wouldn’t cover. If I had to undergo treatments which impacted my productivity, such as chemotherapy, the extra cash injection from my critical illness cover would reduce the financial strain on me and allow me to focus on getting healthy.
My income protection would kick in if I was unable to work for more than a month and if I suffered an event that left me permanently disabled, my disability lump-sum cover would pay for me to adapt my home and lifestyle and my income protection would pay until retirement age of 65.
My decision to have a non-accelerated policy (where my life cover remains unaffected if I claim on any disability or illness cover) means that if the worst happened and I did not recover from my illness, my life cover would at least pay out enough to help my husband with the mortgage and our kids’ education.
Putting together the right blend of insurance cover for your needs is important. We should not only be focused on insuring death, because during our working life, we are statistically more likely to suffer an event such as illness or disability.
The right life insurance for your life stage
Your cover should also change depending on the stage of your life. The best kind of insurance product is one that is flexible and grows as you do.
The needs of a 25-year-old are very different from those of a 40-year-old, which in turn are very different from the needs of a 60-year-old. You don’t necessarily want to have to take out new insurance policies every time you have a life event.
Many insurance providers offer things like future cover where you pay a small premium today but you are able to significantly increase your insurance cover without underwriting (ie, medical questions) at a later stage.
Young and single: If you are young with no dependants, your biggest risk is that you are unable to work. At this stage insurances like critical illness, disability and income protection are important. You do however, want to have the ability to take out life cover at a later stage should your situation change. Many insurers offer future cover which enables you to increase life cover without underwriting.
House and kids: If you have financial dependants – whether they are your children, parents or a spouse – you need to have life insurance that will provide for them if you die, as well as cover to settle your estate costs. If you buy any asset, be it a house or car, you will have to take out life insurance to settle the debt in the event of your death, but remember you have the right to shop around for the best deal.
Kids moving out: As you get older and your children are becoming independent and your house is paid off, your insurance needs change. You have less of a need for life insurance but are more likely to face disability or critical illness risks. A good insurance policy is one that allows you to shift some of your premiums away from life cover and to boost your cover for higher-risk events.
How much do I need?
The best way to assess your needs is to look at what monthly expenses you need to cover and for how long.
A good adviser will help you put together the right blend of insurance based on your monthly expenses. Some insurers now build this into their quoting system so although you are insuring for a lump-sum payout, it translates into a monthly income.
For example, I calculated how much income would be required each month to provide for my children until they each turned 25. I was then able to purchase cover for this specific need.
This resulted in a significant premium saving as most insurance policies sold are “for life” even though you may not need it as your needs change.
If you have life and disability insurance through your employer check whether there is a conversion option. This means when you leave your employer you can retain the life cover without further underwriting.
You need to assess whether the cover is sufficient and consider taking out some personal cover as a top-up. Keep in mind that once you retire, you will no longer have employee benefits and would need to have your own life insurance.
Temporary disability cover: This is short-term insurance which pays you an income for a temporary disability. If the disability is permanent, then permanent disability will kick in. This can also take the form of income protection cover.
Permanent disability lump-sum cover: A lump sum is paid out to cover once-off expenses like moderating your home or car. This lump sum can also be useful to settle outstanding debts. The insurance company first has to ascertain that it is a permanent and not temporary disability.
Permanent disability income cover: This pays an income until retirement age if you are no longer able to work. It is important to realise that this does not continue to pay into retirement, so you still need to be saving for retirement.
Term or whole of life: A term policy is for a specific period and may match a specific liability such as your home loan or providing cover for children’s education. This can make cover more cost effective as you are only insuring for a specific time frame. Keep in mind that if nothing happens to you, once the policy comes to the end of term, there is no refund. Whole of life is a policy that only ends on your death. This could be used for covering estate costs or leaving a legacy. Make sure you can afford to keep up the premium payments in retirement.
Guarantees: This is the length of time your premium is guaranteed for. Insurance companies are allowed to increase premiums above the agreed amount once you are outside of the guaranteed premium period. This could happen if an insurance company needs to re-assess its risk exposure, for example after a major event like a global pandemic. It is important to compare guarantee periods when comparing insurance quotes.
Premium pattern: There are different types of premium patterns you can select. An age-rated policy tends to be cheaper, but the premium goes up each year according to your age and may become unaffordable in retirement. A level premium is more expensive initially, but the premium only rises by an inflation factor each year. The idea is that you pay more when you are younger in order to cross-subsidise the premiums when you are older.
Escalation: Policies have two types of escalation – premium escalation and claim escalation. Premium escalation is how much your premium goes up each year and claim escalation is how much your cover increases each year. This is usually adjusted for inflation. If you have an age-rated policy, your premium will go up each year above inflation as your risk increases as you get older.
Disability and critical illness cover
The industry has provided a standardised way for insurers to explain the rate of cover, which helps you to compare products.
Conditions covered: Lower-premium products only cover four or five major conditions like cancer, heart attacks and strokes while other policies may have “richer” cover that extends to more conditions. If you have a family history of disease, find out if that disease is included.
Severity: Policies pay out differently according to the severity level. For example, some policies will pay out 100% at stage-one cancer; another policy may pay out only 25% at this stage while another will pay out only for stage-three cancer. Some policies pay out disability cover if you lose one arm or one leg, while other policies only pay out if you have lost two limbs.
Accelerated cover: Accelerated cover means that your life cover is reduced by the amount you claim from disability or critical illness. For example, if you had R1 million life cover and R400 000 critical illness cover and were diagnosed with cancer, you would be paid out R400 000 from your critical illness cover. However, if you subsequently died due to the cancer, your life cover would have been reduced to R600 000. Standalone cover is more expensive, but it means that any claims from disability or critical illness will not affect your life cover.
Retrenchment cover: Some policies include retrenchment cover where your premiums are covered in the case of a retrenchment.
This article first appeared in City Press.