Importance of life cover
Life cover or life insurance is offered by either an insurance company or a financial institution such as a bank.
The amount paid out on death, disability or severe illness will depend on the monthly premium amount. This lump sum payment will be paid either to a nominated beneficiary or to the life assured’s estate.
It is important to be aware that most insurance companies contain exclusions in their terms and conditions. For example, they will refuse payment under a policy if the person commits suicide within the first two years after the policy became active. Condition-specific exclusions, such as diabetes or cardiovascular diseases, and occupation-specific exclusions such as high-risk occupations, could also form part of your life policy, so it is important to know what you are covered for and what you are not covered for.
Over 70% of South Africans do not have life cover. This is due partly to a lack of financial education and partly to the assumption that life cover is too expensive. It is worth your while to discuss all your options with a qualified financial adviser.
What are your options?
- Risk cover - This may include life cover, disability cover and critical illness cover, depending on your requirements.
- Life cover - This will be a lump sum payment to your beneficiaries or your estate in the event of your death. You can choose whole life cover or a term policy (often used when one has to insure an outstanding mortgage that has a set term).
- Critical illness cover - There are several levels of critical illness cover available but most would cover you for a severe illness or a heart attack. It is vital that you know if your insurance policy will cover you at 100% of the insured amount if you do contract a severe illness or if it will payout a percentage depending on the severity of your illness.
- Often, clients are under the impression that they have a certain amount of cover for a critical illness. Only at claim stage are they informed that they will receive a percentage of the insured amount since their illness is not deemed severe enough. Again, your financial adviser can ensure that you are covered by a product that will not consider the level of severity when you claim.
- Disability cover - This could be in the form of a lump sum that is paid out if you become permanently disabled and unable to perform your current job, or in the form of monthly payments (income protection) that will payout in the event of temporary or permanent disability, depending on the product selected. Disability cover is linked to your ability to perform your own job or a similar job or to work at all – again, you need to know upfront which of the above criteria applies to your policy.
Who needs life cover?
The notion that life cover is only needed later in life is a misconception. “Young people often dismiss protection as something for older people,” says Tom Baigrie, chief executive of an independent financial company.
The rule of thumb when considering life cover is, firstly, to find out if there is anyone who would be financially affected should you die and, secondly, to consider if you have any debt. If you are single with no dependants and no debt, you would rather look at taking out disability or critical illness cover, to ensure that you do not become a burden on the state or your parents should you become ill or disabled. If you have dependants and your monthly salary supports them, life cover is essential so that they are taken care of in the event of your death.
Everybody has different needs in life. We, therefore, recommended that you speak to a financial adviser regarding the various options available. A qualified financial adviser is trained to advise on your insurance needs and will do a financial needs analysis to ensure that you are not over or underinsured. Beware of over-the-phone insurance sales where your needs are not taken into account.
Remember: it is never too early to take out life cover. You cannot take out a policy after you become ill or disabled unless it comes with a (usually) lengthy list of exclusions or the premium has been loaded to make up for the risk you pose to the insurance company.
Even if you start small, just get started. You have nothing to lose by requesting a quotation from a financial adviser.