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Life Cover Hacks

in Disability, Dread Disease, Financial Advisory, Life cover Leave a comment
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Secrets from an insider

‘Life Cover’ is probably one of the major grudge purchases a working age adult will make, and once you start adding other benefits it can become really pricey. Here are some hints and tips so you can make sure you’re getting what you expect, without paying the earth now – or in the future.

‘Life Cover’ insurance is made up of 3 major components – Life, Disability and Dread Disease but is all classified as ‘life’ cover because the insurance company has to have a ‘life license’ to offer them.. There are a few ancillary benefits like funeral cover, retrenchment cover etc., but these are all still classified as ‘Life Cover’. This might sound like semantics but some gap covers have fallen foul of this definition and are having to remove ‘life’ benefits like cancer lump sums.

Actual ‘life cover’ – cover that pays out if you die, need not be for life. If you take it for a defined period (called ‘termed cover’) and not for life you will be able to save money. First prize is if you can increase this without underwriting at a later stage if you still need it.

At the very core Life cover should cover your debts, liabilities plus the cost of getting your children financially independent. If you have agreed to allow your life partner to be a financial dependant on you for life, then his/her costs for the rest of their life needs to be factored in too (and you may need cover ‘for life’.) If you don’t keep on increasing your debt (smart), life cover should decrease and not increase every year.

Life cover is pretty simple, either you’re dead or you aren’t. Dread disease is slightly more difficult but there are now global standards of severity. Disability is a nightmare – be very careful which provider you choose. (Use an Independent Financial advisor who can get you a variety of quotes from different providers).

It is possible, in fact often preferable, to use different providers for the different ‘life’ benefits so that you get the ‘best of breed’.

Life cover can be bought purely on cost, as long as there are no nasty surprises in small print (read the general and specific exclusions paragraph carefully before signing.) When getting comparative quotes ask for projected premium increases on level or age-rated premiums and compare them side by side or graph them. The differences will shock you. By all means get a quote from a call centre life company – their premiums are usually a good 20% above the lowest premium from one of the big providers (and almost always age rated). Someone has to pay for all those TV ads – don’t make it you. Always get a comparative quote if you’ve decided to DIY and read all the small print and graphically plot the premium increases.

If you’re lured by the ‘cash back’ promises of some Life companies be aware that this is not free. Get a quote before and after the ‘cash back’ and compare it to investing the money yourself. Remember, if you cancel the cover or have to claim you lose that benefit, if you’ve invested it you won’t.

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Dangerous Assumptions – Group Risk

in Disability, Group Benefits, Income Continuation Benefit, Life cover, Permanent Disability, Temporary Disability Leave a comment
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When a financial planner looks at your risk (life/disability/dread disease) needs, he or she is supposed to take your group risk cover into consideration when making recommendations and in effect assume that you are adequately covered. This can be a dangerous assumption and leave you or your family badly exposed when it comes to claim time.

Life cover itself is fairly uncomplicated. Clearly you either are dead or you aren’t. Ditto funeral cover. If you’re really unlucky and have been killed at the wheel of a car when you’re drunk or by hitting your head on the bottom of a fountain after a (not so hilarious) night out with the boys then some of the insurers might baulk, but on the whole, life cover is life cover, wherever you go and however you get it. Just make sure that it isn’t ‘accident cover’ only. That is a cheap and nasty subset of life cover that only pays out if you’re in an accident, not if you have heart attack or any other less spectacular exit plan.

Dread disease on Group Risk cover is less common, but where you do find it is usually a ‘severity based’ product paying out a percentage of (what is normally) only one year’s salary. In other words at stage one cancer, (when most cancers are detected) your payout will range from 0-5%-25%. Dread disease cover is an increasingly important part of medical risk cover (see my blog HERE) but is expensive and falls a way down on your list of priorities.
Group Disability cover is the biggest concern. Ninety percent of the group Disability cover, especially permanent disability cover, is appalling and quite frankly not worth the policy paper it is written on. Why? As per usual, it is in the small print. Do yourself a favour, ask for the full Group policy document before downgrading your personal cover in favour of group cover.

Look for wording like “…if, in the opinion of x provider” (what happened to objective international standards?).

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Disability Insurance Cover – broken by small print

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Low expectations

The risk on not being physically (or even mentally) able to continue to work through to retirement is probably the biggest risk for anyone of working age. Much of the focus on ‘Life’ cover is on just that – Life. Nobody wants to be seen as an irresponsible sod leaving kids destitute if you die prematurely and leave a pile of debt behind for them to sort out while the bank puts them out on the street. The good news is that you’re not going to be around to hear the criticism. What if the event that might kill you doesn’t – it just nearly does. A stroke that leaves you speechless, and not in a good way. A car accident that writes off the car, but isn’t quite as efficient with you. Who is going to look after you, what are you going to do for money?
It’s a morbid topic, so please excuse the dark humour – anything else is going to sound like a sermon. It’s all very well to say your Mom/Girlfriend/Husband will look after you but guess what – they are under no obligation. Okay maybe your mother is, but if you’re a miserable grump if you even have a sniffle, I wonder how long a wife or husband is going to stick around.

If you have been responsible enough to take out disability insurance cover, the last thing you want is for some petty bureaucrat to tell you you’re not disabled ‘enough’ and to get your lazy ass back to work. All disability products are not created equal and rather find out those shortcomings now, when you can fix them, than when you really need them.

Group disability insurance products (that you get at work, and you pay for as a ‘fringe benefit’ and are part of that bloated Cost to Company that you never see), almost without exception, are atrocious. The wording on almost every single product is the same and based on a ‘code of good practice’ for Disability produced by ASISA, formerly known as the LOA. If you actually read that document you find that much of the small print the providers blame on ASISA or the Labour act is nowhere to be found, or is in a much diluted form. If I didn’t know better I’d say that the big insurers have actually colluded to give the illusion of risk cover when the truth is far different. I have heard excuses muttered about people ‘ripping off’ the system (which certainly occurs in the States), the fact that decent cover will increase the number of claims and the fact that the ‘risk pool’ and low premiums justify the shoddy product.

So, if you can get hold of a copy of your group policy, this what should you be looking out for:
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Life Insurance – The questions you need to ask your broker

in Disability, Dread Disease, Income Continuation Benefit, Permanent Disability, Risk Assurance, Temporary Disability Leave a comment

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Are you getting what you think you are?

Just because you’ve taken out Life Insurance– Life, disability, funeral, income protection, dread disease cover etc – you’re okay jack – right? It can be a relief when we eventually take out some sort of risk insurance that has been nagging us forever. Once signed and delivered more often than not we forget about it. I’m not saying you need to keep obsessing about it, but apart from the annual review your advisor is obligated to do with you, make sure you really know what you’re getting.

Here are some questions you should be asking:

  • Disclosure: Have you been completely honest in answering the questions? If not… could you get caught out? Let’s face it, we often forget stuff that happened years ago. That minor whiplash in a car accident or that rugby concussion. Once you remember, get hold of your advisor or provider and disclose it. If you don’t and have a back injury that triggers a disability claim, the providers will investigate. One of the biggest areas of non-disclosure is drug use, with good reason. The provider’s view any drug use, no matter how long ago, as high risk and it is can lead to outright exclusions. Unless you were either busted for drug use or went to rehab, it is obviously very difficult for the insurer to pick up. Occasionally it will appear in reduced liver function (as will excessive alcohol consumption).
  • General exclusions. When you get your policy document don’t just check your cover, check the general exclusions. These differ from provider to provider but might include things like death or injury as a result of engaging in a criminal act or something unlawful, suicide/ self harm (2 year exclusion, but this may be extended to life-time). On the disability side some of these ‘general exclusions’ can be quite onerous with certain providers – for example for lower back injury or mental disorders (difficult to prove but make up a chunk of claims).

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Checklist for Financial DIY

in Asset classes, Disability, Dread Disease, Economy, Estate Planning, Financial Advisory, Financial Plan, Investment, Retirement funding, Short term Insurance Leave a comment
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You need to find out what you don’t know

Partially as a result from pressure from the regulatory bodies like FAIS, and partially as a result of the evolution of Financial advisory into a profession as opposed to a brokerage, clients can now choose what sort of ‘advice’ they want to receive, and whether or not they want or need a relationship or merely need an ‘order-taker’. Even within the ‘Financial Advisory’ basket there will be a wide range of experience and qualifications that you can choose from, as well as the choice between a ‘linked’ agent (only one provider) or an IFA – Independent Financial Advisor. Many advisors today have professional qualifications, like a ‘Certified Financial Planner (R) ‘ designation, that is similar to other professionals like Chartered Accountants and requires an extensive examination process in order to be accepted.

If you feel that you don’t need financial advice, I am not going to try and persuade you otherwise ( in this blog anyway). There are loads of things I do myself. I am not going to call out a repair person when my washing machine won’t empty, I know it’s probably a sock or something blocking the outlet. I replaced my broken garage remote receiver for R100, saving myself a R650 callout fee for doing 2 minutes work (and probably having them tell me my motor was also broken).There are so many tools and resources out there on the web, that it is more than possible for you to competently look after your finances, if you’re prepared to do the homework and aren’t in a hurry.

Step one: You need to find out what you don’t know. This is moving from being ‘unconsciously incompetent’ (when you don’t know that something exists, so you can’t possibly be incompetent) to finding out what you don’t know (so you are now conscious that you’re incompetent). If you try and do all your own finances when you’re in either of these boxes, it will end in tears.

Step Two: Learning what you need to know, slowly becoming consciously competent in order to DIY. This isn’t going to take five minutes. Insurance providers can take someone straight out of matric to qualified to give ‘life’ advice in 3 months (full-time study) but that really just covers the basics and those advisors have to be under supervision for two years. So here’s a study list:

Medical aid: Don’t bother, and the providers probably won’t let you. The commission is so minuscule that unless the broker specialises in big corporate medical aid schemes, they are probably going to look after you as a service because they manage your investments or life portfolio. You only ever need a broker to help you change plans annually and if a claim goes pear-shaped and it needs to be escalated to an Ombud. Changing medical aids is a mission, you have to be seriously annoyed to go down that route. Investigating which plan within your medical aid to use just needs a few hours reading, and some calculations of your current use.

Short-term insurance: The direct and call-centre providers (the ‘DIY’ providers) have made massive inroads into this market, usually on the promise of ‘bonuses’ for not claiming.You might get a paragraph on your needs so that they can tick the box to comply with the FAIS act, but not much else. These bonuses are deliberately only paid every 4-5 years. They are ‘golden handcuffs’, you aren’t going to want to move in case you lose the bonus. You’re also likely to ‘self insure’ some claims so as to protect your bonus. In South Africa, the likelihood of not claiming on anything for 4-5 years is small. Now that you’re stuck for 4 years, you might just find that your annual increases start hurtling out of control, and the cover was never cheap to begin off with. Don’t be sucked in by ‘cheaper’, it is likely to be ‘cheap and nasty’. Ask for a detailed line by line comparison with your existing cover. Don’t just look at the bottom line, what are you giving up? Compare excesses, exclusions (especially on geysers and water damage, how they replace (especially jewelry), ‘averaging’, security requirements, payout on jewelry not in a safe when stolen. A broker will give you this line by line comparison.

Life cover: Before you get on the phone and buy some life cover direct these are the sort of things you need to know:

  • What your life needs are: your debt plus the ‘present value’ cost of caring for your dependants (you can work this out on a financial calculator).
  • Funeral needs: Is there liquidity available or does this need to be provided for? Should it be separate or will the provider give an early payout.
  • Temporary disability needs : Salary replacement after tax, waiting periods, in-claim increases,claim criteria, term (24/36 months?), occupational loading
  • Permanent disability : Salary replacement or the discounted cash flow of all future paychecks to retirement. How additional income is treated (passive and active income), claims criteria, effect of occupation and ability to do nominated occupation on claims. Lump sum requirement. What a termed policy means. Retirement age and its effect on premiums.
  • Dread disease – if you have medical aid, this is a want and not a need.
  • If affordability is an issue, what is the most important and why. Where do you cut and where not.
  • Your existing/proposed and group benefits need to be considered. If you’re over-insured on disability, the excess will be confiscated.
  • What premium pattern are you going to use – level or age rated, and what are the long term implications of this.
  • What annual increase are you going to put in place, and how does this impact the premium over time. With some providers a 5% annual increase in the benefit results in a 7.5% increase in premium, compounded over time.
  • What are the general exclusions, and what specific loadings or exclusion might be imposed on you.
  • As an individual, not working with a broker, you may not be able to get comparative, commission-free quotes from the top providers.
  • Who you should make a beneficiary and why. The difference between ‘property’ and ‘deemed property’ in your estate.
  • If there are any ‘investments’ linked to the life product – what is the small print? How can you lose it? Would it stand alone as a good investment? – project the value through to retirement, mimic it with an ordinary investment, moderately invested.

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Income protection. Good News. Bad News

in Disability, Financial Plan, Income Continuation Benefit, Permanent Disability Leave a comment
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Tax changes to income protection policies triggers a rethink

It is quite rare that a change happens in the ‘life’ policy arena that is a game changer, but 1st of March is going to see one of them. From Sunday, premiums toward ‘income protection’ policies will not be claimable off tax anymore. Obviously this is bad news. Because of the relatively high probability of claim, this cover is relatively expensive and getting a chunk of it back from SARS was very appealing. You can understand why the treasury did it. Because of the huge ‘underinsurance’ prevalent in the country, the amount they were giving back to us workers (for doing their job, quite frankly) far outweighed the amount they got back by taxing income from disability recipients. This move also levels the playing field. A couple of providers have used the fact that their payouts are tax-free to attract clients (and often in a sin of omission, fail to highlight that they could be claiming those premiums off tax).
So, that’s the bad news, what is the good news. Simply put, because you now need less cover because the monthly ‘salary replacement’ is tax-free, it is going to be cheaper. The higher your tax bracket, the more you can cut back. It goes further than that. It is an opportunity to rethink the entire structure of your life policy, giving you better cover and hopefully saving your premium that can now be diverted into investment – instead of a grudge purchase.
What sort of structure would suit this new ‘tax-free’ environment? Income protection (and it is called different names by different companies) is made up of two parts – Temporary and permanent disability. Temporary disability usually has a lower “proof of disability or sickness” and kicks in after 1-3 months (typically) but can also kick in after 1-7 days for professionals. This usually has a 24-36 month life, again with all sorts of small print that often the brokers themselves aren’t even aware of. This is the highest claim area of all the risk products, and will often trigger with a dread disease claim. Most providers will then have a separate permanent disability income product ( Discovery’s is not separate, but they have a unique product, so this is not necessarily a bad thing). In the past, because the premiums were tax deductible, it made sense to have a permanent income tacked onto the temporary income, especially if you could put different amount of cover in each and get tax relief. Temporary protection could produce an ‘essential’ income for the 24 months, but on permanent disability, one would need to get as close as possible to a 100% salary replacement.
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