Life insurance is one of the least understood financial necessities. By design, it’s intended to provide financial security in the event of an illness, injury or death. Yet ironically, it’s one of the few sectors where the product a customer pays for doesn’t always meet the need for which its purchased in the first place.
We, as a life insurance provider, are addressing this discrepancy between the structure of life insurance sold, with the nature of the cover that is actually required. More than a simple disconnect between a customer’s needs and the solution provided, there is the impact this mis-match can have on an individual’s life and the risks they are exposed to because of it.
Protect your future income against your most likely risk. We face four major risks in life: temporary injury or illness, permanent disability, critical illness and death. Of these, temporary injury and illness is by far your greatest risk during your working career, no matter what stage of life you’re in.
You are 9 times more likely to have a temporary disability than to have your car stolen or hijacked in South Africa1. Our #RealityCheck research shows that 66% of South Africans spend up to R1500 each month on car insurance, yet the average monthly premium for temporary disability and critical illness would cost roughly R400 a month2. Prioritising the wrong cover is dangerous: many of us don’t have financial pockets deep enough to dig into our savings (or sick leave) every time our income is disrupted due to an illness or injury.
Choose the type of benefits that do the job you need them to do. When selecting or reviewing your life cover, you can structure your life insurance by opting either for a lump sum or an income benefit. An income benefit is perfect to replace your monthly salary in order to cover ongoing expenses like your bond, education, groceries and other household bills; whilst a lump sum benefit suits once off, larger amounts such as estate duties.
And yet, an overwhelming portion of South Africans have lump sum cover in place to provide cash flow in the event of a disability, critical illness or death: 77% of disability cover sold in South Africa is currently in a lump sum form3.
What many South Africans don’t realise is that traditionally, lump sum cover only covers you for a permanent disability, a critical illness or death. It does not protect you from anything in-between. Now, consider this fact knowing that in your working career, you are almost certain to experience a temporary injury or illness that prevents you from working for a short period like two weeks. In fact, according to our claims statistics, your risk of confronting an incident such as this is, is as high as 70%5.
This behaviour is similar to wanting a red car but buying a green one on the premise that you can always have it painted red afterwards. While this would be an absurd idea to any car buyer, South Africans are paradoxically buying lump sum cover in the hopes that, should they be unable to work due to a serious setback such as a heart attack or a car accident, they will be able to maintain their standard of living and provide for their day-to-day living needs4. 88% of our claims in 2018 were for a period of less than 90 days – meaning that lump sum disability benefits would not have paid out for these claims.
Insure your income before anything else, the rest will follow. There is a stunning simplicity in protecting 100% of your income with income benefits, and complimenting this structure with a small lump sum amount to cater for any additional expenses. All you need to know is what you earn.
You don’t have to try figure out how much lump sum you require to best support your financial needs in the future. You don’t have to make assumptions around inflation or worry about investing your money. You won’t be tempted to spend it on luxuries like expensive holidays or cars, and best of all, you don’t have to consider how long you need to make your money last.
It’s important to understand the products that are available to you and the likelihood of the risks you face during your lifetime. Here are 7 tips when purchasing life cover:
- Typically, most life insurers go straight to insuring against death and permanent disability with lump sum benefits. That’s the old way of thinking. The new way is to first protect 100% of your hard-earned, monthly income against what’s most likely to happen, which are the risks of injury, illness, or being diagnosed with a critical illness.
- Use a lump sum to cover additional once-off expenses against the risk of critical illness, permanent disability and death.
- Review your insurance portfolio annually and notify your financial adviser of any changes in salary or of major life changes like occupation, marriage, having children or buying a home.
- Ensure you choose an insurance product that can support these changes without you having to go through any further medical underwriting. This is very important because if you’ve had a claim or your health has changed, and your insurance provider requires medical underwriting for any changes, you may land up with exclusions or may not be able to adjust your cover as you require.
- Don’t only compare prices between insurance providers, as you may not be comparing “apples with apples”. Ask your adviser what the different waiting periods are and what the claims criteria is for each product – it may mean the difference of qualifying for a claim or not when you need it.
- It’s also important to understand the premium pattern of your policy. A level premium may prove more expensive to start with but, for a given amount of cover, the cost remains constant over the duration of your policy so it’s cheaper in real-terms the longer you have the policy. Age-rated premiums increase with your with age. The premium charged each year matches the probability of claiming in that year. As such, the premiums increase every year, and the increases tend to get steeper as you age.
- Non-disclosure at application stage may mean not qualifying for a claim later on. Failing to provide full and accurate information may be completely unintentional because you may think your full medical history irrelevant but it may spell the difference between having a claim paid or not. Rather supply too much information than too little.
We advocate for the irreplaceable value of sound financial advice, and opting for the right mix of life insurance benefits that will shield you from having to dip into your rainy-day funds or even worse, going into debt, when unforeseen disruptions in income arises.
1FMI Claim Stats
2Calculation based on average 30-year old male, non-smoker, gross monthly income of R50 000
3FMI Disability Cover Study 2018
4FMI True South Report 2017
5FMI #RealityCheck Survey 2018