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Life Cover Hacks

in Disability, Dread Disease, Financial Advisory, Life cover Leave a comment

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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Dread Disease… not just a nice to have

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Dread disease cover – Coming into its own

Ten years ago ‘dread disease cover’, usually added to a life policy, was a ‘nice to have’ and tacked on last. More often than not it was taken out by clients who had been exposed to family dread disease and wanted to be buffered from that, perhaps feeling that genetics would play a part. Even 10 years ago medical aid covered more (that silent erosion of benefits is usually overshadowed by the double digit increases) so the cover was there to make career and lifestyle changes. In other words it was there to give the claimant breathing space to take advantage of the ‘second chance’.

Dread disease pay-outs are usually made as a lumpsum, and the amount paid out varies enormously by provider and plan. When one gets struck down by a dread disease it is like losing a part of yourself, a part of your future, and one often goes through the classic grieving process. Shock and Denial, Pain and Guilt, Anger and Bargaining, Depression, Recovery, Reconstruction and finally Acceptance. That lumpsum often plays a vital role in coping with the anger and feeling that ‘this isn’t fair, it isn’t my fault and someone must pay!’

While the old reasons for taking out dread disease cover are still valid, today new reasons are emerging. For a start, the incidence of dread disease is rising, not just because we are living longer, but thanks to our lifestyle ( so, yes, it is often our fault – whether we like it or not.) We now have a 1 in 4 chance of contacting a dread disease before the age of 60, and rising thereafter. Huge progress is being made with many of the diseases, but none of these come cheap and medical aid covers less and less every year. For many families the medical aid payments are more than the car payments every month.
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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
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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Insuring fear – dread disease cover

in Behavioural finance, Dread Disease, Income Continuation Benefit Leave a comment

Uncomfortable truth

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.
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