A primer on life insurance: what you need and why
17 Jun 2020
Covid-19 has thrust the importance of life insurance into the limelight. But life insurance isn’t just about leaving a legacy and supporting your family when you die. It’s also about living benefits that help you navigate the impact of a severe illness or disability, says Sinenhlanhla Nzama, Investec Life’s Head Product Actuary.
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Perhaps most visible in the affluent and high net worth market, having the right life insurance in place can protect your wealth from creditors and estate duties, preserve your lifestyle when faced with a severe illness or disability, and give you access to critical care when you need it most.
The ability to keep servicing your debts and meeting your responsibilities without having to downscale your standard of living is an essential part of planning for the future.
Sinenhlanhla Nzama, Investec Life Head Product Actuary.
Rather than being a single product, life insurance is a combination of benefits – it’s not only about the death benefits that payout when you die, but also about the living benefits that support you through illness or disability. There’s some overlap, but each product pays out when specific events or conditions happen in your life. You also don’t need to take out every product all at once, or even at all. Among the basket of insurance costs, actual life cover alone is often the most affordable.
Life cover: Protects those you leave behind
Severe illness cover: Helps you manage a life-changing diagnosis
Depending on the plan you’re on, you may also need to self-fund certain types of advanced or progressive treatments that aren’t part of a prescribed minimum benefit. You may also need time off work to recover; just because you’re out of the office doesn’t mean your expenses stop. Severe illness cover gives you the capital boost you need to cover these situations. You’re usually paid out a percentage of your cover value based on the severity of your condition.
Disability cover: A lump sum payment for additional support
Income protection: Paying you an income when you’re unable to earn
Choose your insurer carefully
They may also combine your life insurance and your living benefits into a single “accelerated” benefit, which means your life cover is reduced when you claim for a severe illness or disability. If your life cover is R2 million, for example, and you claim R1.5 million from your severe illness cover for a cancer diagnosis, the remaining death benefit to your family is just R500 000.
Other insurers may promise paybacks and cash incentives the longer you keep your policy active. Essentially, these are structured so that part of your premium is pre-funding part of these cash incentives. This has upsides and downsides.
On the upside, you’re being forced to indirectly save each month, with a cashback portion paid to you at certain intervals. On the downside, your premiums may be higher than they need to be. And if you cancel your policy because you can’t afford the premiums, you could lose both your life insurance and the cash accumulated to date.
Particularly for the high net worth individual, proper financial planning is essential. If policies are not structured optimally, you or those you leave behind may face unexpected tax liabilities or complications when claiming.
For example, many high net worth clients may use debt financing to acquire assets that are highly valuable but not very liquid. This can mean cash shortfalls soon after death to cover estate costs and settle debts, which can destroy wealth if assets (particularly property and offshore investments) need to be sold in a rush.Arguably the best kind of life insurance is efficient, relevant and flexible enough to adjust to your lifestage, health outcomes and way of working. Some people are entrepreneurs who need cover that accounts for an earning cycle that may be sporadic or concentrated into particular times of the year. Some people run their own practices or consultancy firms that must keep running if they’re off sick and can’t come into the office for a few months.
Instead of a taking a policy that bases your cover and premium on the data set of a generic population group, look for cover that’s more personalised. You want insurance that looks at you as an individual and covers you appropriately without over- or under-insuring you. This will keep your premiums sustainable while still offering you generous protection to safeguard your health, wealth and legacy.
Investec Life Limited is an authorised Financial Services Provider 47702.