When should I buy life insurance?

The short answer is much sooner than you think you will need it!

Youth is wasted on the young

The challenge is that a 20-year-old appears to be healthy and sees cover as a grudge purchase. Young people often think that they are invincible. In their case, accidents are the biggest cause of death and disability. The good news is that, because they tend to be heathier, this is a good time to buy a basic Life, Disability and Dread disease package.

Adults who are faced with their own mortality – perhaps the death of a loved one or the birth of a baby – often wake up to the fact that they may also leave others behind! Health issues and age may complicate their cover medicals and affect their installments.

A life insurance package should be seen as a basket of products. Not everyone will need all the sub-packages and not every type of cover is available to all.

A typical life insurance package could have several elements:

  • Life Cover – this is a product that will pay a lump sum to your beneficiaries upon your death.
  • Funeral Cover – this funeral policy element will usually pay within 3 days of processing all the paperwork. Amounts of up to R50 000 will often be paid out.
  • Terminal Cover – should the life assured be diagnosed with a terminal illness, most responsible insurers will release the death benefit before death.
  • Dread Disease Cover – Some companies will use a different term to describe their equivalent product. Dr Marius Barnard designed this product and introduced it to South Africa. (You may remember his slightly more famous brother, Chris Barnard, the first doctor to conduct a successful heart transplant.)

    There is a list of conditions that an insurance company will pay for and these may differ from company to company. The devil is in the detail – make sure you check what is/is not covered and consult a professional who can explain the conditions of payment.
  • Income Replacement – income replacement kicks in should the life assured be unable to work for a set period and continues to pay a monthly amount until the condition improves.
  • Lump-Sum Permanent Disability – while the above benefit pays for temporary disability and pays out monthly, this benefit pays out a lump-sum benefit should the condition be so severe that no recovery is possible.
  • Retrenchment and unemployment cover – ‘young achievers’ have a high risk of being retrenched. However, it is also a fact that technology is changing and supplanting previously ‘safe’ careers.

    The cover generally provides you with a tax-free monthly income as a percentage of your salary for up to six months. Be aware that there are specific qualifiers.
  • Guaranteed Future Cover – one cannot predict the course of one’s life, so it is always better to prepare in advance. You may want a higher amount of life cover than you can afford right now. Do not be discouraged!

    With this type of cover, you can instruct your underwriter to review your cover after 12 months with the option of increasing it (which comes at a higher cost of course). The benefit is that you do not have to buy a new product. This means you do not have to go through the rigmarole that goes with establishing your baseline health status. You will also get more favourable rates than if you took out new cover at an older age because the underwriting is completed at the commencement of plan.

How much is your life worth?

If you have life insurance, you know that if you pass away, your family will be able to replace some or all the income you earned. But how much does it cost to insure your life? How are life insurance premiums calculated?

Life insurance premiums are calculated for each individual. When you apply for life insurance underwriters assess your risk factors and use this information to calculate the appropriate premium for the sum assured. If there is a high risk that you may die prematurely, there may be a loading, which means that your monthly premium will be higher than a standard premium.

The variables

Gender: Because women live longer than men, their life insurance premiums are lower.

COVID-19 of course has affected life expectancy world-wide. Though it is not possible to see the final impact yet, current records show that more men die of the virus than women.

Age: The younger you are, the cheaper life insurance will be.

Education: It is believed that the higher your level of education is the longer you are likely to live. One reason for this is because higher education levels are associated with higher incomes, which means better nutrition and healthcare.

Occupation: If your occupation is high risk – a security guard for example – that may put you at risk of dying earlier than the average person in your age group. This will affect your insurance premium. The debate on the logic of the level of risk attributed to various occupations is a heated one! This is why it pays to shop around and ask for clarification from your Financial Advisor.

Smoking: Non-smokers live longer than smokers. The difference between insurance premiums for non-smokers and smokers can be 25% plus. Smoking includes vaping.

General health: Poor health, such as being obese, or having a chronic condition that is not managed increases the risk that you will die sooner than your healthy peers. Most people whose health is impacted by the above will pay higher premiums.

Be aware!

  • Lying about your health can lead to insurers’ refusal to pay out. You may have to pay penalties and your actions may be seen as fraud.
  • If you see the phrase ‘no physical exam needed’ RUN! These policies tend to only cover accidental death and do so only under certain conditions. The public is often not made aware of these upfront.

So, how much is ‘enough’?

I do not like self-service buying over the web. Deciding the amount of cover you need is a complex calculation best done together with a Financial Advisor.

Should everything remain the same in the family and their economic environment, the payout of your Life cover should be enough to:

  1. Settle all debt
  1. Pay for the funeral (around R20 000)
  1. Allow for the costs of settling your estate
  1. Be sufficient so that loved ones could live off the interest on the residue (NOT the capital) until youngest is self-supporting

My personal pet hate

I detest the TV adverts where a proud and smiling face states that you can buy R400 000 for R200 pm. For many people this sounds like a LOT of cover. However. Let us look at what would happen if Mary died, and the family received a payment of R400 000:

Let us say the family invests the lumpsum. They will receive an estimate of R 2 100 per month during the first year. Currently, the South African inflation rate is low, but it will climb again in the future. As this happens the value of that interest becomes less and less. It is clear that the woman needed much higher cover!

I hate these advertisements most because they provide a false sense of security to those who can often afford it the least.

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