- Everyone needs assurance against death and disability.
Life assurance against death and disability is the most important product sold by the financial services industry. It is something everyone, except the very wealthy, needs.
The importance of having life assurance - also known as risk assurance - is underscored by asking yourself two simple questions:
- What will happen to me (and my dependants) if I am sick and/or disabled and no longer able to earn a living?
- What will happen to my dependants when I die?
A casual read of any newspaper will tell you how often people are disabled or die when they are comparatively young.
There are some financial risks you can afford to take yourself, such as not being able to buy a luxury vehicle if you are disabled.
But there are other risks, such as paying for the education of your children if you were to die prematurely, that you need to share with others. This is what risk life assurance is all about: sharing the risk with many other people. Millions of people pay into a pool of funds. If the unexpected or bad luck comes your way, you draw money from the pool. If you are lucky, you will not have to claim the benefits.
Not being paid a benefit does not mean you have paid the premiums fruitlessly. It means you have enjoyed many years of peace of mind knowing that both you and your family would not have been left destitute if the unexpected had occurred.
Deciding whether or not to take out life assurance has nothing to do with taking a bet that you will die at age 100 in your bed. It is about ensuring that you and your dependants will never be put at risk should you be hit by the proverbial bus.
Risk assurance comes in many different guises and can be structured in a multitude of different ways.
At different stages of your life you will need different risk assurance products and different benefits. You constantly need to revise what and how much risk assurance you require, particularly when your circumstances change. Marriage, a birth, a death, divorce or a pay increase can all alter how much life assurance you need.
This spread on risk assurance will help you assess what risk assurance you need, how much you require and how to choose the right products.
Your guiding principle should be to aim to ensure that both you and your dependants can maintain a certain standard of living, no more and no less. Risk assurance is not there to make anyone wealthy. If you spend too much on risk assurance, you will be denying yourself money that could be spent on other things that you require now.
Generally, you should avoid taking out policies that combine risk life assurance with investment assurance. The reasons you should not do so include:
- Your life assurance and investment needs change, often in different directions. For example, as your assets grow, your life assurance needs are likely to decrease. Life assurance investment policies are contractual. An alteration in a policy may result in a penalty being deducted from your savings.
- There are no penalties for cancelling a risk assurance policy.
- Risk life assurance is normally for fairly long terms. If you link investment assurance to the same term as risk assurance you leave yourself with fewer options if you want to take advantage of new investment products, which may have lower costs and therefore provide better returns.
Furthermore, if you lose your job, you may have to cancel your entire policy, incurring penalties. On the other hand, if you have a separate risk policy, you can maintain the more important risk cover while stopping your payments to a savings instrument.
- Among other things, you can protect your savings plans, standard of living and business interests.
The main reasons you must take out risk life assurance against dying or becoming disabled include:
You need to make sure that your dependants will be able to maintain their current standard of living after you die and/or that you and your dependants will continue to enjoy your current lifestyle if you become disabled and are unable to earn a living.
The savings plans you have set up for specific needs will be at risk when you die or if you become disabled. For example, you may start saving for the tertiary education of a child born today, but what happens if you die or are disabled before you have met your savings target? Risk assurance will make up for the shortfall.
The savings plans can be comparatively short term, such as for education, to longer term, such as ensuring a spouse/partner has sufficient money in retirement.
People to whom you owe money have the first claim on your assets when you die. You must ensure there will be enough money in your estate (your total assets less your liabilities when you die) to pay off all your debts.
If you own a business, it will probably need money to survive after your death, particularly if it is a one-person business or a partnership in which each partner is essential to the functioning of the business.
Estate duty of 20 percent is applied to any amount above R3.5 million in net assets (your assets less your debts) in your estate.
Death is also what is known as a capital gains event. In other words, any capital gains on most assets you own will be taxable less an initial exemption of R120 000.
Remember there is no estate duty or capital gains tax on bequests by one spouse to another.
At the death of a policyholder, life assurance benefits become payable within days to a named beneficiary.
Often a family faces short-term hardships if it does not have immediate access to a sound cash flow after a breadwinner dies. But life assurance benefits (both investment and risk assurance) do not have to go through what can often be a lengthy process of winding up an estate.
- Here are the main types of policies you can buy.
You have many choices when choosing risk life assurance, and the various options can be mixed and matched to meet your particular circumstances. The main choices are:
This is life assurance that you purchase for your whole life. It does not mean you have to retain the policy for your entire life; the policy can be cancelled at any time.
The advantage of whole-of-life risk life assurance is that once you have been accepted by the life company, it cannot avoid paying a benefit by cancelling your policy if you become ill or are seriously injured and are expected to die soon.
Whole-of-life assurance can be structured in many ways. For example, both your premiums and your level of cover can be increased every year to take account of rising inflation. Or you can choose a level of cover and a premium that remains constant.
This is life assurance that covers a predetermined period of time - either very short or very long. Term assurance can be structured in a number of different ways. These include:
The benefits increase at a predetermined rate.
Your benefits decrease at a predetermined rate. You can use this type of assurance to cover debt that is declining or when you have a savings plan for something such as the education of a child. As your debt reduces or your savings increase, you require less assurance.
This type of assurance gives you the option of renewing the policy at the end of a pre-selected period. The advantage of this is that you are not normally required to undergo a medical check-up. The new premium will be based on your age rather than the state of your health.
This is essentially term assurance, but the cover is normally linked to a specific debt, such as a home loan or vehicle financing.
This is a variation of whole-of-life risk assurance and is aimed at couples who are married or who live together. Joint-life assurance comes with three options:
- It will pay out when one of the partners dies. There is no payout when the second partner dies.
- It will pay out only when both partners have died.
- It will pay out equally on the death of each partner.
This type of assurance will pay out either an income or a lump sum if you are disabled and are unable to earn an income.
This type of assurance pays out for a defined medical or physical condition. The decision whether or not to pay out is made by medical specialists who assess the condition's impact on your ability to undertake daily living tasks rather than whether or not you can work.
This assurance pays a benefit if you suffer from one of a number of listed chronic or dread diseases, such as heart disease, a stroke or cancer. The list varies between life assurance companies. You should consider the companies' lists and what amount they will pay for different conditions before you decide on the company and the policy.
This assurance pays a benefit if you develop a disease from which you are certain to die. All or part of the benefit will be paid out when the disease is confirmed.
These polices are designed for specific purposes. Examples are:
This is one of the most popular types of assurance and is aimed a providing a benefit to cover funeral costs.
which are designed to help you meet the high cost of good-quality education. Education policies include savings plans and allow for the payment of benefits at different stages.
which ensures that your premiums are paid for you by the life company for both risk and investment assurance under particular circumstances, such as disability or death (in the case of joint-life assurance). This is an excellent benefit that is often overlooked.
which pays out a benefit if you are killed or disabled in an accident.
- Ask your financial adviser to help you work out your risk assurance needs.
No single static amount of risk life and disability assurance is suitable for everyone. You can have too little or too much life assurance, although few people have too much.
The worst thing you can do is to base your final decision about how much risk life assurance you need on a rough guess.
You need to take out assurance that suits the requirements of the different stages of your life, your personal circumstances and the general economic environment. It is also not only a matter of how much life assurance you need but also how much you can afford.
Changing factors (variables) require that you assess your life assurance needs regularly. These variables include:
- As you move through the different stages of your life, such as getting your first job (a good time to buy disability assurance), getting married, having children and when your children leave home;
- Your personal circumstances, which can include everything from your health (and life expectancy) to a major salary increase and the period you will work; and
- The economic and financial environment. This can have a significant impact on how much risk life assurance you need. For example, a high inflation rate means you will continually have to adjust the amount of cover you require, but high returns on your savings can dramatically decrease the amount of cover you need.
All these variables can be difficult to assess. For example, how can you tell when a child is born how long that child will be dependent on you, or what the inflation rate will be in 10 years' time?
In calculating how much risk life and disability assurance you require, you need to:
- Calculate how much money you and your dependants require annually and for how long. You also need to take account of the inflation rate.
- Add any debts and future commitments (for example, education of children) that are not already covered by credit life assurance.
- Add costs of death. This includes funeral expenses and any tax liabilities.
- Deduct from the total of those amounts how much money you have saved, taking into account future investments and returns.
- Deduct any future income from a spouse or partner.
- Deduct any lump sum payments. Lump sums could come from a group life benefit, any existing life assurance policy or a lump sum payment from a retirement fund. If you are a member of a defined benefit fund, the benefits, particularly in the early stages, will be greater than those from a defined contribution fund.
These calculations can be difficult, particularly when assessing variables such as inflation and investment returns. The best way to calculate your life assurance and other financial needs, such as savings goals, is to obtain financial advice from a qualified and registered financial planner. You should be prepared to pay a fee for this type of advice.
In terms of the Financial Advisory and Intermediary Services Act, a financial planner must provide you with appropriate advice. Appropriate advice is based on what is called a financial needs analysis.
Among other things, a financial needs analysis will identify:
- Your current financial situation; - Your financial goals;
- How and when you will achieve those financial goals;
- The needs of your dependants;
- How much life and disability assurance you need; and
- Most importantly, what type of assurance products you can afford.
Once you know how much risk life assurance you need, you must shop around. You need to obtain quotations from three or four life assurance companies. Life assurance is a competitive business and you will find that premiums differ between companies.
You must also take the following issues into account when buying a policy:
Always check whether the premiums you pay on your risk life assurance are guaranteed and, if so, for how many years. Also find out if there are any limits on the guarantees. For example, can the assurer impose unlimited premium increases at the end of the guaranteed period or will the increases be limited to, say, 10 percent?
If the premiums are not guaranteed, you should establish under what conditions they will increase. For example, does the life company have total discretion or will the increases be limited to, say, the inflation rate plus a fixed percentage?
Understand whether your premium is level (that is, the premium will not change from year to year because you are getting older) or whether the premiums follow an age-rated or a proxy age-rated pattern (that is, the premiums start off lower but increase each year as you get older).
You may also be able to take out a policy with voluntary premium increases to enable you to get more cover. You may also increase your premium and cover at the end of the guaranteed term, and this increase will take account of your age and other factors.
Many assurance policies have exclusions, such as for suicide or a pre-existing health condition.
- Know the pros and cons of the two main ways in which you can buy life assurance.
Risk life assurance cover can be bought in two main ways: individual and group risk life and disability assurance.
This is a policy you take out in your own name. Your personal circumstances are individually assessed to establish how much you will pay in premiums and even whether a life company will provide you with risk life assurance.
The factors that a life assurance company takes into account when selling you an individual policy include:
The younger you are, the cheaper your assurance premiums because you are less likely to die young.
Women pay lower premiums on average than men because they can expect to live six years longer than men.
You are normally required to undergo a medical examination when taking out individual cover. The sicker you are, the more you can expect to pay because you are expected to die sooner than someone who is healthy. It is unlikely you will be able to obtain life assurance if you are likely to die soon of a terminal disease.
If you smoke and drink heavily, you will pay a higher premium because those habits are likely to shorten your lifespan.
If you have a high-risk job, such as diving for diamonds, you will pay a high premium.
If your hobby is to collect stamps, you will pay a lower premium than someone who base jumps off Table Mountain every weekend.
Higher levels of education normally result in higher income and, consequently, a healthier lifestyle and better access to top-quality health care. This means life assurance companies expect you will live longer.
A note of warning: never lie or keep quiet about facts that you know will affect your premiums. If you give false or misleading information knowingly and the life company finds out, it will repudiate your claim. In other words, your dependants will not be paid a benefit.
Rather pay a higher premium and know that there will not be a problem if you die or are disabled.
This type of assurance is sold on the basis of what can be described as affinity groups. These affinity groups can be restricted to, say, the employees of a particular employer, or can be as wide as funeral assurance sold to anyone who shops at a particular retailer.
Group life assurance is different from individual life assurance cover in that it is the risk of a group that is assessed by the life assurance company, and the premiums are set accordingly. Thus the premiums for a group of office workers are likely to be lower than for a group of miners. In this way, group life assurance can have advantages for people who are in ill-health or who have other risks that would otherwise result in their having to pay high premiums for an individual policy.
The disadvantage is that group assurance may cost someone in a low-risk category more, particularly if they are in a high-risk affinity group.
You are seldom required to undergo a medical examination for group cover, but you may be required to answer questions that could exclude you from receiving cover in a broad affinity group.
Another problem with some group policies is that you are covered only while you are a member of that affinity group. If you are part of a restricted affinity group, such as being entitled to group life and disability cover while you are a member of Acme Ltd's retirement scheme, you will lose the risk cover when you leave Acme's employment. Some such group schemes have a conversion option that allows you to continue the cover after leaving. This will have a higher premium but has the benefit that you do not need to have a medical examination to qualify for the cover.
Be wary of anyone who advises you to cancel an existing policy. This is not to say that you should never switch your life assurance cover. The industry has become more competitive, and people are generally expected to live for longer once they are no longer in the high-risk HIV/Aids age groups. These factors have made life assurance cheaper.
However, you must take care for the following reasons:
- You may have a long-term premium guarantee. You should not switch out of a level-premium policy, where you are paying, for example, R100 a month (and always will because it is a level-premium policy), to a new, age-rated policy, where you pay R80 a month initially, but R90 the following year, R100 the year thereafter and R500 in 10 years' time.
- If you cancel an existing policy before a new policy is confirmed, you could find yourself without any life cover if you have developed a terminal disease of which you may not be aware; or your premiums could be considerably higher if you have contracted a serious health condition, even if it is not immediately life threatening. Be aware that an exclusion on the payment of a benefit could also be added to the policy for that health condition. In other words, your dependants would not be paid out if, say, you had developed a heart condition and you died of a heart attack.
- You could incur significant losses if the policy has both a risk and an investment component. Life assurance companies can deduct up to 30 percent of your accrued savings if you cancel a policy with a savings element. You need to carefully consider the costs of exiting one policy and the initial and other costs of a new policy.
Make sure you understand what the different types of risk life assurance mean and under what conditions the benefits will be paid. For example:
This assurance can be provided by both long-term assurers and short-term insurance companies. A contract with a long-term assurer means the life assurance company cannot cancel your policy if your health suddenly deteriorates. A policy with a short-term insurance company is renewable every year, which means the policy could be cancelled every year. If your health has deteriorated, you may not be able to get a replacement policy.
These two types of insurance are often sold as alternatives to each other. Most responsible financial advisers suggest you should have both. The reason is that under certain circumstances impairment assurance may not pay out or may not pay out as much as you would receive from disability assurance, and vice versa.
Impairment assurance is based on your contracting certain medical conditions, while disability assurance is based on your ability to do your job or a similar job.
Disability assurance comes with different costs and benefits. For example, if you are assured, at a lower premium, for being unable to do your job, you will not be paid a benefit if you can no longer do you own job but you can still do some other job. Disability assurance that will pay a benefit if you can no longer do your own specific job will incur a much higher premium.
Always name a beneficiary in any type of life assurance policy. The reasons are:
- The money will be paid to the beneficiaries you name within days of your death. If you do not name any beneficiaries, the money will be paid into your estate, and it could then take months before your beneficiaries see any cash.
- There will be no executor's fees if the money is paid to your beneficiaries and not into your estate - this is a saving of about 3.5 percent excluding VAT.
However, the amount paid out on the policy may still be subject to estate duty. Make sure you leave enough money directly to your estate to cover the payment of tax and debt claims against your estate.
Note: always ask for written confirmation of the beneficiaries you have named. There have been cases where the names of other beneficiaries have been inserted fraudulently in a policy document.
Group life assurance cover attached to an employer-sponsored retirement scheme is unlikely to be sufficient to meet your risk life assurance needs. This is particularly the case if you are a member of a defined contribution retirement fund.
The reasons are:
- A defined contribution scheme pays out your accrued savings plus life assurance cover. This life cover is likely to be about three or four times your annual pensionable income. So the younger you are, the lower your accrued savings will be and the lower any benefit paid to your dependants.
- A defined benefit retirement scheme pays a benefit to your dependants based on the assumption that you would have worked until retirement plus the insured benefit. This means your dependants will receive a higher payout if you die young.
But the group life cover provided with defined benefit schemes tends to be lower, at one or two times your annual pensionable salary. This means a combined accrued retirement benefit plus a group life benefit that could be lower if you die shortly before retirement.
Note: neither a defined benefit nor a defined contribution scheme is likely to meet your disability or life assurance needs. Most people need to top up with individual assurance.
You cannot be forced to purchase a life assurance policy from a specific company. This is something of which you should be aware, particularly in the case of credit life assurance.
When you purchase credit life assurance from a credit provider, often it is either insinuated that you have to purchase the credit life offered by the provider or you are not provided with all the life company options. Attempts to force you to take out a particular policy in order to be granted credit is called conditional selling and it is illegal.
You must insist on being given quotations from various life assurance companies or you must obtain other quotations yourself.
Both partners in a relationship should have life assurance, even if one partner is the homemaker. If both partners work, the income shortfall on the death of either partner will have to be made up.
The contribution made by the homemaker, particularly if you have children, would also need to have a value placed on it - for example, how much a crèche or care services would have to be paid in lieu of a homemaker.
Calculate separately the minimum amounts of life assurance you and your spouse or partner require, because the requirements are likely to be different.
If you have a policy that includes assurance against dying, being disabled or ill-health, your creditors (people to whom you owe money) can make claims against proceeds from the policy only if the proceeds amount to more than R50 000. If the full value of the policy is less than R50 000, your beneficiaries will be paid out. This is to protect your dependants from being left destitute when you die.
When you cede a policy to a bank or a credit provider ensure that conditions are added to the cession in terms of which any residue amount will be paid to your estate or dependants. For example, you should name a beneficiary to any residual amount that might be payable after the credit provider has deducted the outstanding debt.
This educational spread was sponsored by the following life assurance companies:
Call centre: 0861 238 473 Email: ease@absa.co.za
Website: www.absa.co.za
Call centre: 0860 100 444 Email: info@aforbes.co.za
Website: www.alexanderforbes.co.za
Call centre: 012 366 3700 Email: clientservice@assupol.co.za
Website: www.assupol.co.za
Call centre: 0860 00 5433 Email: lifeinfo@discovery.co.za
Website: www.discovery.co.za
Call centre: 011 351 5000 Email: talk@hollard.co.za
Website: www.hollard.co.za
Call centre: 0860 327 327 Email:
Website:
Call centre: 0860 724 724 Email:
Website: www.metropolitan.co.z
Call centre: 0861 300 789 Email: advice@momentum.co.za
Website: www.momentum.co.za
Call centre: 0860 947 366 Email: via the website
Website: www.oldmutual.co.za/greenlight
Call centre: 0860 123 777 Email: memberservices@pps.co.za
Website: www.pps.co.za
Call centre: 0860 81 82 83 Email: clientservices@prosperitylife.co.za
Call centre: 0860 726 526 Email: life@sanlam.co.za
Website: www.sanlam.co.za