The dos and don'ts of life insurance
How to make sure you're getting the right cover
Life insurance is often the last thing that people think of when it comes to their financial well-being. Most would never buy it if they didn't have a broker trying to sell it to them.
This is unfortunate because the result is that many people don't understand why they need it.
“Most people don't wake up in the morning and think that they need some life insurance,” says Michael Goemans, the CEO of Investec Life. “But everyone should be concerned about something happening to them that would affect their families or their lifestyle. If you can't work you can't earn an income, but you or the dependants you leave behind still need to live.”
Essentially life insurance, disability cover and serious illness cover are about protecting you and your family in the event that you can no longer earn an income or incur a major life impact, whether temporarily or permanently. Everyone should think about how they would manage if that were to happen.
“Our view is quite simple,” says Robin Gibson, a financial planner at Harvard House. “Individuals sell their skills and time in return for an income. This income meets their consumption needs, some of which funds debt. Life cover should do nothing more than settle debt and provide the difference between your current accumulated capital and the capital sum required to purchase a sustainable, escalating income for the family’s future needs.”
This is critical for everyone to understand. Life cover serves a very particular purpose, and it's therefore vital to know what you should, or shouldn't do when it comes to taking out a policy.
Know how much you need
“You shouldn't buy cover you don't need,” says Rudi Schmidt, the MD for short term insurance and life at Alexander Forbes. “Think cautiously because it costs you money. Buy the cover you actually need and spend time determining what that figure should be.”
The question, of course, is how you know what is enough. Fortunately there are many online tools that help to answer this question, and your financial adviser should also be clear on how they reach the figure that they are proposing.
“Typically you look at what you are covering,” says Goemans. “This often doesn’t have to be an overly complex calculation, and the products that meet this need also don’t have to be as confusing as has traditionally been the case.”
For death and disability cover, this generally means paying off your debt and having enough cover to generate an ongoing income.
“Severe illness cover is however often a more subjective assessment of what you want extra money for,” says Goemans. “Maybe your medical aid won't pay everything, or perhaps you will need to change your lifestyle, or take time off. You have to weigh up these needs based on some objective calculations, but also your individual risk appetite and affordability.”
Don't rely on group cover
Many people working in a corporate environment will have some level of life cover through their company. While this is very useful, no one should assume that it's all they need.
Firstly, some of these policies only cover death and not disability or serious illness. More importantly, however, most people are likely to change employers a number of times during their careers and they don't retain their cover when they move from one to the next.
“Your level of group risk cover will vary with every employer, so I always look at group risk cover as supplementary,” says Schmidt. “You should never make it your core or fundamental cover in financial planning because it is not sustainable and varies through your life.”
Also, group cover policies can take up to a year to pay out because the fund has to identify the right beneficiaries. Direct life insurance will pay out in a week or two if beneficiaries are nominated and not disputed.
Don't buy non-underwritten products if you don't have to
There are plenty of funeral and accidental death cover
policies available in South Africa that market themselves on not requiring any medical examination. However, what many people don't realise is that this kind of cover is far more expensive than taking out a traditional life insurance policy.
“A lot of people are scared to go for medical tests for fear of finding out that they have an underlying ailment like HIV,” says Schmidt. “But for these non-underwritten policies, the premium for the same level of cover quadruples. The only time you should do this is if you cannot get underwritten cover.”
Get cover on your terms
Most people who have life insurance have a policy because a broker told them what they needed and sold it to them. However, greater awareness and the use of technology are giving more influence to consumers in this process.
“Gone are the days when the company you are engaging with should be able to dictate what you do and how you interact,” says Goemans. “They shouldn't force you to buy products you don't need, or to use a channel or avenue that you don't want to use.
“If you want to be able to do things on your own terms, you should be able to get that,” he adds. “It's a new world, and as a client you should be able to determine how you want to do things.”