Preparing in life for what is to come thereafter – investing in life insurance

Jabu decides to grow up

At 30, Jabu has just been promoted. He is now the youngest senior partner at his firm. He realizes how lucky he is in these difficult times and feels he should do something to mark his new sense of achievement, but also of responsibility. With all the regular updates of COVID-19 infections and deaths, he has started wondering … what would happen to his family, should he
pass away?

Jabu is married with two children. The eldest started school this year. With the disruptions that the Coronavirus has caused in her schooling, Jabu and his wife are seriously considering home-schooling. It may mean that his wife will have to work fewer hours and not advance along the career ladder as fast as she would otherwise. When lockdown started, his wife’s mother came to live with them. It is only once you spend significant time with your elderly parents that you can truly see how OLD they had become. She has been a lifesaver during lockdown though. Both parents had to work from home. His wife did mention that they should consider letting Gogo move in for good… It is time to invest in Life Cover.

So many products, so many companies

Jabu tells us that it seems that all the agents whom he phoned were more interested in selling him something than really listening to him. They wanted to tell him how big the savings would be, but would not explain how they arrived at these figures. Call centres frustrated him! He could never get to speak to the same person twice!

An independent, advice-based service provider is what Jabu needs

When Jabu reached out to us, he made it very clear that he had specific questions he wanted answers for and that he would not be pressurized into making immediate decisions. We like clients like Jabu! It is important to take charge of your finances and ask questions until you are satisfied with the answers.

J: How does life insurance work?
NFS: In exchange for a monthly premium the insurer offers you a list of benefits. These could include:

1) Life cover – Upon your passing, the insurer offers to pay a benefit to the beneficiary of your choice. Usually, the benefit is offered as a lump sum. However, if you feel it would be more beneficial to the beneficiary, you can instruct the insurer to set up a fixed monthly benefit. Typically, payments will be made after all the underwriting requirements have been met.

2) Funeral cover – Most new life policies will allocate up to 10% of the total life cover benefit or up to R50 000 for funeral expenses. Funeral benefits are paid within 24 hours of proof of death. In the case of violent death, the police have to provide evidence that the beneficiary was not a party to the murder. This is an unhappy reminder of the high levels of violence and insurance fraud encountered in South Africa.

3) Terminal cover – Not many people are aware of this benefit. Should you be diagnosed with a terminal illness the financial advisor can arrange for the early release of the full death benefit, prior to your death. This may help the person whose life is thus assured to settle debts or make final donations as they see fit.

4) Critical illness/dread disease cover – This is paid as a lump sum upon diagnosis of a dread disease. There are more than a dozen variations of this benefit. For some, you need to be diagnosed with the condition by the age of 60 or the benefit falls away. For others, the cut-off could be 65, whilst some provide you with cover until your death. Your insurance policy will define which dread diseases are covered. It is important to discuss this with your financial advisor in detail. They will help you go through the different options available, considering your health and circumstances. At NFS, we believe that dread disease cover is the most important part of your risk cover portfolio.

5) Disability cover – A lump sum is paid out, should you no longer be able to work because you have contracted a serious illness or suffered a significant injury. It must be a permanent condition.

6) Income replacement cover – This benefit kicks in if you are temporarily unable to earn an income from your usual occupation. There is a waiting period of between seven days to two years, depending on the option you choose. The length of time for which you will receive this benefit is also influenced by the option that you chose.

7) Other ‘rider’ benefits – These are benefits that you may, under certain conditions, attach to your policy. Examples could be retrenchment or premium waiver cover. You must discuss this with your Financial Advisor.

8) Future Guaranteed Cover – Underwriting for a policy is done when the plan is designed. Younger people tend to have fewer medical conditions. They may not always have the finances to afford the appropriate amount of life cover. This ‘rider’ allows the insurer to underwrite for cover NOW that you will only buy LATER. It is a cheaper way of buying fairly significant amounts of life cover.

A note on who makes the money – the issue of commissions

No policy is given to you without somebody receiving a commission. Whether you are responding to a TV advert you had seen, or you are sitting across from an insurance broker from an insurance company, someone is earning a commission. The consultant must, by law, tell you how much commission they are earning in the first and second year of the policy.

If they work for an insurance company, they will earn benefits in excess of the figure that appears in the quote. As life insurance is only one of the aspects we discuss within the context of your financial plan and you pay an advisory fee upfront for the whole service, it is the policy of NFS to accept only 20% of the allowable commission, in order to cover administrative costs. We pass this saving on to you for the life time of your premium. We follow this unique approach to avoid a conflict of interest which arises when the financial advisor is remunerated chiefly through commission. According to NFS, our role is that of advisor, not a sales representative.

J: How do I know if I have enough life insurance cover?
NFS: This is why we are always glad when clients come to us for advice, instead of just buying a policy that sounds like it will give their heirs a lot of money! It often does not!

There are different way in which a determination can be made. Speak to a financial advisor about your personal finances and your world as a whole. This will give you a much clearer idea of what your heirs will need and what you can realistically afford. Your financial advisor will spend some time helping you with certain calculations such as:

  • Current debts (including your mortgage and other loans)
  • Living expenses and educational funds required to look after your children
  • Living expenses of your spouse
  • Living expenses and any additional health or care-related expenses for adult dependents or children with special needs

In all our years of business, we at NFS have yet to come across a do-it-yourself policy that worked! The calculations that need to be made are just too complex. It requires formal study and experience in the fields of tax and estate duty, amongst other things.

J: The forms seem to be quite cumbersome to complete. Do I have to answer them in such detail?
NFS: You have to answer all the questions truthfully. The insurer will use the information you provide and underwrite the policy based on that. When a claim is made, they will verify the information you gave. If you failed to tell them that you have diabetes or that your father had had a stroke, they could deny the claim.

Final Words

Writing a definitive thesis on the subject of Life Cover will take us at least 50 pages. World events, such as COVID-19, continuously influence the development of new legislation and policy options. Your needs may change in multiple areas of your life. Your financial advisor will have your back. They are knowledgeable both about the ramifications of these disruptive events on the financial services sector as well as the implications for your life.

Remember, these articles are meant to share information with you and get you thinking. Be like Jabu. Ask questions of someone who will take the time to listen and help you reflect on what is important to YOU. We will only venture into advising you once we have met virtually on the platform of your choice and looked at the whole picture together.

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