I t really does. We hate paying for it, we hate the call from the broker that sells it, mostly, besides the people in it, the general public thinks insurance companies are rogues and do whatever they can to not pay out. Our industry has a bad name and this article is here to clean it up, as is my daily work.
So, what is Life Insurance, and where should we have it in a Financial Plan?
Here I am going to paint a picture of situations that you might find yourself in.
Life Insurance... Little do we realise that it is the best investment ever made when the proverbial hits the fan. On the other side, if you never claim, you should be very grateful that you haven’t had to and have enjoyed fantastic health. People will insure their cars worth R500k with full comprehensive cover, car rental, no excesses, full replacement and all the other bells and whistles attached, but then, you don’t insure yourself fully and comprehensively? The question begs to be asked: What is more important, you or the car?
The concept of life insurance is quite simple: It is borrowed money, until we have enough of our own.
When Bill Gates was 21, he didn’t need death cover. When he got married and bought his first home, he needed to cover the bond and maybe his income for his wife and kids if he died prematurely. Do you think Bill Gates has any life cover now? No, I think he has enough of his own money. hahahaha
Life Cover is there to replace and fill the gap. If I die unexpectedly, my wife still needs the income that I bring in, so our lifestyle can stay the same, so my children can go to the right schools, so my wife doesn’t have to go to the local Keg to find a new me. I also don’t want her to, or expect her to find a job. How will she find a job that brings in the income that I do, how can she hold 2 jobs? Realistically, in practise when an income dries up for a spouse, there is far too much Financial pressure that adds to the already major emotional pressure. How do we fix this?
Disability Cover is probably the most technical of them all. We get 5 different types of disability products. 5! Oh my goodness... which one do I choose?
Let me explain:
The 1st disability product on the market was physical disability. It’s definition is/was if you lost a limb, it would pay out a percentage of the sum insured depending on the size of the limb. But what happens if you don’t lose the limb?
For example, Joe Soap has a stroke and loses use of his left arm. It hasn’t fallen off, but it’s as good as not being there at all!
So, along came the upgrade: Functional Disability. This pays for loss of and/or loss of use of limb and functional systems.
The American Health Standards Guidelines are used to determine the impact on lifestyle in the event of a disability. A thumb is a 10% payout for example, whereas a leg above the knee is a 50% payout. The bigger the limb, the bigger the payout. But what happens if a heart surgeon loses his operating hand? Is a 10% payout going to be sufficient to support his lifestyle? Is 50% even enough?
So, an improvement was made.
Insurers keep up with market trends and needs. We hand pick the best solutions for the requirement, at the time for you and with you. We educate you, to help you make an informed decision.
So along came Occupational Disability (O.D) and if a person was disabled and couldn’t perform an occupation, a 100% claim event happened. The problem here (albeit an improvement on functional) was that it was OD. It’s definition being: if you cannot perform AN occupation, your occupation, similar occupation or ANY occupation in which you are fitted in terms of experience, ability and status, they wouldn’t pay out. How vague is this definition?
I’ll go back to the heart surgeon. He loses use of his right hand through chronic arthritis and cannot perform his occupation and puts in his claim, expecting a 100% payout of his sum insured. The insurer states, he can still work. AND HE CAN!!! He can be a GP; a lecturer; a consultant. It doesn’t matter that his earnings will go from R5m a year to about R1m a year if he’s lucky. They are not funding the loss in income/revenue. They are covering his ability to perform AN OCCUPATION: his own, a similar, a reasonable or any occupation that is fitted in terms of status, experience and ability. This is a very popular, yet vague definition.
An improvement was needed and an opportunity created: Own Occupation Disability O.O.D is the acronym.
You are insured and underwritten as per your Own Occupation and if you cannot perform your exact role, it will be a 100% payout. You won’t be asked or forced to be the new front office receptionist, if you are a Financial Director.
So, if the Heart Surgeon got Arthritis in his hand, he would be paid out 100% of his claim, however, if I got Arthritis in my hand, as a Financial Advisor, I would still be able to perform my Own Occupation, and thus would I not get a payout.
Comprehensive Disability is a combination of all of the above definitions. It is the Rolls-Royce of Disability definitions. Again, you wouldn’t take a Rolls-Royce off-road, or on a race track, so your advisor needs to help define your needs and apply the correct disability product to your financial need. Personal cover, business cover, buy & sells, contingent etc. all need different products.
YOUR PLAN HAS TO BE TAILOR MADE.
Dread Disease: Now this is an exciting area in Life Insurance. It is probably the most competitive area with each insurer trying to outdo the next with more disease covered, higher payouts etc. How
did it start? Another World first, besides the first successful heart replacement done by Chris Barnard, his brother Marius masterminded the fist Critical Illness payouts and benefits. After the success of their first transplant(their was one done in the UK, but the client died on the operating table of other issues and therefore wasn’t deemed successful, even though it was a success) people came in their droves to fix their tickers. Unfortunately not all of them could afford the procedure. So Marius went to the clients insurer and said to them, that if they don’t operate on the client and the client died, the insurer would pay the full portion of the life cover. If they did the op the client had a 60-70% chance of surviving for at least another 10 years. Pay out a % of the life cover now, to Marius and Chris to do the op and the balance would be paid years later when the client died. If the client cancelled the policy, well the insurer
would have saved millions. If the client kept it, it was another 10 years of premiums. A win win all round. This was the birth of Critical Illness benefits, as Oncologists got on board for cancer treatments, cerebral and nervous system specialists for Stroke’s and Bypasses.
Which one to choose, how much to get?
As much as you can afford, while you are insurable! It will also never be cheaper now. So climb in! It is the one product you’ll keep forever. Death cover and Disability will fall away eventually. Critical Illness events happen more and more frequently, the older you get. So get a meaningful amount of cover. The max amount at application stage is R5m.
The next choice you face is: Do you want a tiered policy(pays out a % of whatever the Sum Insured is) or a 100% payout? Do you want the widest breadth of cover, or do you want to just cover the major diseases and events?
Premium Patterns are another bone of contention! And it’s an area that you know nothing about. How does a broker phone you and say that for the same monthly premium we will give you double the cover? Or for the same cover, he can halve your premium? Is he a magician? Is your current broker charging you to much?
Before you jump ship, try remember this example:
(Neither car dealership was harmed in the making of this example)
I went to a car dealership and saw a car on it’s lot. It said R12,000.00/month. OK.
I then saw the exact same car, with all the same features at another dealership for R8,000.00/month. Why was this one cheaper? Is it a better deal? Is the first dealership ripping me off?
No!!! There is a residual on the car at Umhlanga. Is it cheaper? Monthly yes, but in the long run? Absolutely not! The Balloon Payment on the car from Umhlanga would definitely cost me more over the next 5 years. Is it wrong? Not necessarily.
Insurance brokers do the same with Life cover premiums. They can make something look cheap, or expensive, an HP type premium, or a Residual(or Balloon payment) type premium. One can be affordability, one can be term of need, one can be on whether he/she signs the deal or not and needs to beat the ‘price’ of his competitor. How would you know, without being properly informed, so you can make the right decision? The unfortunate thing here, is that most brokers don’t understand the long term effects of an incorrectly structured premium pattern.
No insurance is cheaper than the other. If it were, everyone would be with the cheaper insurance company and there would be no competition.
Advisors and brokers also make things Stand Alone or Accelerated:
Stand Alone seems a higher price, because each product stands alone and it’s like having one policy for Death, another completely separate for Disability and another completely separate for Critical Illness cover, etc, etc. Each Benefit is underwritten separately. If you have a claim on Dread Disease, it does not affect in any way, any of the other benefits on your policy.
Accelerated cover is where one buys a Life Plan of say for example R5m. Accelerated off the R5m Life cover is R2m Disability and R1m Dread Disease and it’s cheaper.
But is it cheaper? When you claim on your disability (or dread), the Life Plan reduces by the claim amount, and in so doing reduces the insured amounts of Death, Disability and Dread cover. Your wife still needs R5m when you die, but I can only give her R3m. The other R2m from your Disability claim, you spent on trying to stay alive- paying for a nurse, getting a wheelchair, changing your car to a van, medical expenses etc.
Now, at your funeral, I have to tell your wife that the kids have to pull out of their lovely school and we’re sending them to another school altogether because it’s cheaper, we have to sell the home and drastically down-scale and send your wife to work 3 jobs! It really isn’t a pretty picture. Don’t let your family be “that” sad story.
Is it cheaper? No. The implications cost way more than the monthly premiums. If you never claim however, it is cheaper, but why would you want to pay for something that you might not want to claim on, because it means your wife gets less?
Individually, an Insurer always loses against one person. Buy life insurance with the best definitions and at a premium pattern that is affordable for as long as you need it.
When bought correctly and applied in the right areas, life insurances form the foundation of a financial plan, offer a guaranteed protection of yours and your family’s lifestyle.
Until then, always be Confident in Business and Life, but never Arrogant. Accidents happen all the time and when they do, you need to make sure that you can keep all that you have worked so hard for.
So, is Life Insurance a worthwhile investment?
ABSOLUTELY! It not only guarantees your Lifestyle, but also is far cheaper than saving all the premium yourself into an Endowment. However, as your Financial Advisor I find the balance in your plan to protect you enough, but so that you can also retire successfully.
I hope that you have enjoyed this article and if you would like a personal Financial Needs Analysis with a Specialist Advisor, please contact me on roland@stratpointfas.co.za or you can contact my Para Planner Savannah on savannah@stratpointfas.co.za to make a time together to discuss what it is you are looking for, why, how it works and if we can help.
*The information in article does not, and is not intended to, constitute financial advice and materials on this site are for general informational purposes only.