As you diversify your investments, ensure you have a sufficient and wide range risk management in place too…
A life insurance contract is typically between a client and an insurance company, where the insurer promises to pay a designated beneficiary a sum of money in exchange for a premium, upon the death of an insured person ( often the policyholder).
Depending on the contract, other events – such as a terminal or critical illness – can also trigger payment. Other expenses, such as funeral costs, can also be included in the benefits. The inclusions of other events can, however, become confusing for the consumer, as some of these events require a separate cover.
“Sometimes all the covers can be integrated and sometimes they are standalone,” says Ana Scott, executive financial planner at Momentum.
She says that people often think they have adequate cover with, say, R2m life cover. However, in the event of disability, for example, the claim can actually erode the life cover. If the disability cover was for R1m, and you claim on it, it could deplete the life cover to just R1m as opposed to the full R2m.
This is one of the reasons Scott advocates for the use of a financial planner to design what she calls a well-diversified risk portfolio.
“What you do with investment policies is what you must also do with risk (insurance) policies.” -Ana Scott, executive financial planner at Momentum.
Scott advises diversifying the risk, ensuring that you’ve got a little bit of cover in place- in case of death, liabilities, critical illness, and loss of income.
A life cover policy pays out a full benefit amount as a lump sum on the death of a life insured. This capital can be used to pay off liabilities and cover ongoing expenses, explains Wynton Mahome, affluent market senior manager, and Jacky Maritz, distribution manager, both at Hollard Life.
Mahome and Maritz say it is important to consider your family set-up and what your needs are, which can be achieved through a financial needs analysis conducted with a financial adviser or broker.
“A financial needs analysis, done by a financial adviser will look at the needs of your family, how old your children are, your debt situation, what your aim is and what you want to achieve with the cover provided for the family.”
Ultimately, as Scott puts it, it all depends on one’s lifestyle.
She warns against the risk of taking out an R3m life cover policy, for instance, solely because your bond currently stands at R3m. “If one spouse passes away, yes sure, the surviving spouse can pay off the R3m bond, but what about the rates and levies afterward?”
Some clients tend to fall into the trap of thinking the R3m is adequate until a financial adviser points out other areas that require money. Liquidity within one’s estate is therefore important. If an executor that is winding up your estate does not have liquidity, and you owe money to several parties, family members would have to cover the shortfall in the estate. If there is no money, then assets are sold off to cover that.
Liquidity could, however, be created via life cover, according to Scott.
You can have five different death benefits or life covers for five different things, for example. One for a bond, the second for education, the third for your spouse, the fourth for liquidity purposes, and the fifth for whatever else you may need. But such a policy would have to be properly structured with the help of a financial planner so that it does not become too expensive.
Funeral cover provides capital that can be used to provide for a proper funeral for the deceased, explain Mahme and Maritz. They say these types of policies payout quickly, as their sole purpose is to give comfort to the family and provide for a dignified funeral of their loved one.
Critical Illness Cover
Critical illness cover provides capital when the insured is diagnosed with a critical illness, such as cancer, a heart attack, coronary artery disease, or a stroke, among others. This Capital can assist with additional expenses incurred due to a critical illness event.
What financial planners try to do is to create a safety net for clients who become critically ill with cancer or some debilitating disease, says Scott. The crux of this cover is whether you will be able to generate the income you have earned before the illness.
“If this is not the case, we need to put a buffer in place, to ease the pressure, so you can get better without worrying about finances,” explains Scott.
A critical Illness Lump Sum Takes Care Of Medical Aid Expenses Not Covered By Medical Aid
The critical illness cover also provides liquidity when you are under immense stress with an illness. The money could be directed towards eradicating debt, such as paying off a car or bond.
Income Protection Cover
Scott calls income protection to cover the powerhouse of insurance products. She says it’s the most powerful product that you can have in your portfolio because it can stop and start. Keep in mind, if you take a disability or critical illness lump sum, once it gets paid out that is, she says.
With income protection cover, if you become ill a monthly amount would be paid to you (not a lump sum) to sustain your income and lifestyle as if you were still working,
Once you get better or recover from the illness, the monthly income protection will not be paid to you any longer, but the protection cover will still be part of your portfolio for future events.
These types of policies pay out a monthly income benefit while the person insured is disabled (temporarily or permanently) and unable to work. This is important when the employer no longer pays a salary to the insured person after their sick leave has been exhausted, and even more so if the person is self-employed, explains Mahome and Maritz.
“ An income protection product is also linked to and keeps up with inflation. So, even though it’s a bit more expensive than a lump sum policy, it’s extremely valuable in that if you do get sick, it never falls away.” Says Scott.
Though people seldom think about comprehensive cover because it can be a bit more expensive, Scott emphasizes not to make a decision based on a premium. “You need to understand what you are covered for.”
The bottom line according to Mahome and Maritz, is to talk to your financial adviser to map out a financial plan that takes your affordability and personal circumstances into consideration and navigate through this potential minefield to safety, for you and your family.
This article originally appeared in the 22 October edition of finweek
Read the original article here