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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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).
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.
When it comes to ‘life’ or ‘risk’ assurance, putting a monetary value on Dread Disease cover is almost impossible. Life cover and disability cover are easily reduced to numbers, you just work out the cost to you or your family should either of those events happen.
So, say (just as an example) you have a massive heart attack with triple bypass surgery. You have a decent medical aid, so your out-of-pocket expenses are minimal. Your doctor books you off work for 6 months – that’s going to cost, right? Yes – but that is what temporary disability cover is for. The doctor recommends lifestyle changes – no more smoking or drinking. Financial implications? A saving.This sort of story repeats itself for most dread diseases, so why is dread disease cover so popular?
There are a couple of ways to look at it: Genetic gambling and anger.
If you have a family history of dread disease, especially heart disease or cancer, there is a far greater chance that dread disease cover will be high on your agenda in terms of risk cover. This is very sound reasoning, there is a higher chance that you will have inherited similar genes. Recent studies have shown that lifestyle only accounts for 30% of the potential risk of getting a dread disease, and genetics certainly pays a role. Ironically the biggest contributing factor is ‘bad luck’. By covering this risk you will effectively be playing the genetic/bad luck lottery. The pay-out you get will effectively be a windfall and compensating you for the ‘bad luck’, basically because you can’t take your ancestors to court and sue them for the ‘bad genes’. Make no mistake, there is nothing wrong with this. It gives one closure, and more importantly should stop the unhealthy need to blame someone – or yourself. With a dread disease payout, someone has ‘paid’ for the crime of your bad luck, or genetic predisposition. That windfall gives you financial freedom to make changes in your life that you might not have been able to before. Early retirement, new career, start a business, move to the coast and so on.
DISABILITY COVER – DECODING THE SMOKE AND MIRRORS
For anyone of working age, disability benefits or cover are not a nice to have, they are a ‘have to have’ – but make sure you’re not swallowing a sugar-coated bitter pill that is going to give you an ulcer down the line. It isn’t the easiest benefit to understand, and many providers don’t help with all sorts of acronyms, abbreviations and BS, so let’s do some decoding.
In the old days you used to get ‘capital disability’ cover, where you had to be so severely disabled as to be a few months away from death before you were paid out. If they could push you behind a desk, you ‘could work’. This shoddy cover gave the whole benefit a bad name, and fortunately things have improved a whole bunch – but be aware – these inferior products still lurk around in some of the older ‘group benefits’ provided by companies.
There are 2 types of disability benefits – lumpsum and income protection, each of which has its merits.
The risk of disability
Like many of my clients out there, I always used to think that disability cover was a ‘nice-to-have’ grudge purchase until I came into the industry and face to face with claims. I couldn’t be more wrong. After life cover for minor dependants, (spice can go out and get a job), it is actually top of the risk list. Somehow it’s okay to spend thousands on comprehensive cover on a car, but if you happen to be in that car that is ‘written off’ there is a good chance you will be in need of as much panel beating as the car! Okay, so maybe it’s politically incorrect to joke about this sort of thing, but it’s about time someone blew away the smoke and obfuscation (yes, I had to spellcheck that one) surrounding temporary and permanent disability.