Life Cover - Insure to Ensure Your Family Lives Well

The Weekender / Business Day 7/8 Oct 2006

About life cover, Winston Churchill once said something along the lines of: "If I had my way I would write the words insure, insure, insure on the door of every home." Although not a glamorous part of financial planning, risk cover is a critical aspect. Risk cover provides breadwinners and their families with protection against uncertainties that may affect financial security.

The majority of South Africans are dangerously underinsured.

The main types of risk cover are life cover, disability insurance, critical illness cover and income protection. Income protection will pay a replacement monthly income to people temporarily or permanently disabled or sick. In this way it provides breadwinners with income until they are back at work. Income protection premiums are usually tax deductible as the replacement income which will be received in the event of a claim will be included in your gross income.

Disability cover is a lump-sum payment in the event of assured people becoming unable to perform their specified or general occupation. It provides them with funds should they become severely ill or injured and are unable to continue earning a living.

While life cover should only be purchased by people who have dependants, disability cover should be purchased from the day people start work. The most valuable asset most people own is their ability to earn a future income.

There are many types of disability cover and financial planners are best placed to advise which is the best option. The types of disability cover include own occupation disability (which pays people who are no longer able to perform the specific occupation that they are currently performing), occupational disability (which pays if employees are no longer able to perform their current or a similar occupation) and total disability (which pays if a person cannot perform any occupation at all).

There have been many innovative solutions for individuals. In addition to the traditional occupation based-definitions, modern disability products now also include physical and functional impairment criteria. This ensures that in the instance of a life-changing event there is a claim payable even if the insured person is still able to perform her occupation.

Critical illness cover (or trauma cover or dread disease cover) is another type of benefit which pays out in the event of an objectively determinable medical condition, for example, heart attacks, strokes and cancer.

This cover is usually fairly expensive as most South Africans will have a critical illness claim at some stage in their lives.

The objective is to alleviate the financial impact on breadwinners and their families, providing funds to pay for the crippling costs associated with these illnesses, including time off work. If you or your family has a history of heart disease or cancer, you should seriously consider this cover.

The purpose of life assurance is to ensure that your family can maintain the same standard of living should the worst occur. It is not to make your dependants wealthy. Your premature death will result in the loss of future income, which could affect your family’s ability to pay debts such as home loans.

Life cover is more relevant to younger people with debt. However, it is also useful for older people as it may be used to offset capital gains tax, estate duty and executor fees. It may then not be necessary to sell assets to pay these costs.

In my experience more retirees should keep life cover for their spouses. This will ensure that the surviving spouse has sufficient retirement capital.

If you are reluctant to purchase the cover required for you or your family, consider that some cover provides better protection than no cover at all and budget accordingly. It is important that you and your financial planner review on at least an annual basis the amount of cover you require. You don’t want to be paying for unnecessary cover; but you don’t want to be inadequately insured.

My advice is to engage an independent financial planner who is focused on your best interests, and not merely aiming at selling you a product.

Visit the FPI website on www.fpi.co.za to select a qualified and certified financial planner.

Debbie Netto-Jonker, CFP™, is founder of Netto Financial Services and was financial planner of the year in 2001.