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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).
Unlikely suspect – gambling with insurance linked investments
Saving and investment is vital, we all know that. Not everyone has the discipline to put money away every month to achieve that and having an investment linked life insurance cover kills two birds with one stone – recognising that is both mature and courageous. It’s like when your nanny put your medicine in a spoon of sugar. The advertising around some of these life policies gives the impression that it is a really good deal. ALL my life premiums back after 15 years! – that is manna to the ears of anyone who has a grudge purchase they pay for month after month – and the providers know it!
Insurance companies found out a long time ago that if they hit the ‘sweet spot’ in your gut and either put the fear of old age in the poor-house or even worse, leaving your children destitute – then millions would, and do, pour billions into their coffers. These ‘investment linked’ life policies, popular with Liberty and others in the 90’s and naughties, fell out of favour a while ago, but they are making a resurgence.
I think most of us know that a ‘Life’ policy doesn’t need to be for life. It’s there to fulfill obligations we might have while we’re building up our investments You know – bonds, kids, trophy wives. Very few of us instantly have enough cash for those obligations when we’re young, so Life cover fills that gap, but let’s face it – it’s a grudge purchase. Nobody gets excited about making provisions for an obligation, except maybe the broker that is churning the policy every two years to make new commission.
If, as you’re coming into retirement, you have more than enough investments that can sort out your obligations, even if you live to 100 (and that is what you should be planning for), then common sense would suggest you dump your life cover. Life and Disability cover isn’t that different from car insurance. You cover the risk when you need it, but when you sell the car and no longer have the obligation, you cancel the insurance. In effect you ‘lose’ nothing (unless you’ve tied yourself into ‘bonuses’ which have effectively shackled you to a provider whether you like it or not). That is why it is called ‘risk’ cover – it isn’t an investment (so don’t be fooled by the clever sales-speak of slick brokers who play on your emotions and try and tell you otherwise).
Having said that…
Don’t just stand there – Do something
When it comes to personal finances there are times to take action, and plenty of other times just to let it be. This applies across the entire spectrum of personal finance, from medical aid or life cover to your retirement and investment.
Your personal portfolio can really be split in two, the risk portion and the investment portion. The risk portion, the grudge purchase, includes things like medical aid, short term insurance and life/disability/dread disease insurance. It’s important that you have a professional determine what you need, objectively, after looking at your lifestyle, commitments, obligations and goals. This report should be completely separated from an action or implementation plan. This ‘needs analysis’ is a regulatory requirement for all advisors and brokers, but can be by-passed by a ‘single needs analysis’ – a one pager where you sign away your right to a needs analysis. Unless you’re a ‘big’ client, the most you can hope for is a ‘robo-advisor’ free report. If you go through a call centre, it might be one paragraph if you’re lucky. If you want something customised and tailored to your needs, you are probably going to have to pay for it. The industry is changing. Fee based or partially fee-based advisors are going to become the norm. In the same way you don’t expect to see your doctor or lawyer for free, you won’t be able to expect free advice from planning professionals. The needs analysis will identify exactly what risk cover you need, implementing the plan is now just a matter of choosing the right risk provider at the right price. Not all risk providers are created equal so if you’re dealing with a ‘tied agent’ (only allowed to implement policies with one provider) then get some comparative quotes. The easiest way to do this is to have the first quote to send to other providers so that they can do a like-for-like comparison. Independent advisors should do this automatically, and the results and reasons for their recommendation in their record of advice. It isn’t easy for someone not in the industry to do a proper comparison, but the professional who did your ‘needs analysis’ should be able to do it for you. Once the plan is in place and implemented, you only need review it with your advisor once a year. Don’t be quick to be sucked in with another broker’s promises of ‘cheaper, better’. Make them prove it with a full comparison report, focussing on the differences in the benefits not just the price, with at least 3 quotes from different providers. In most cases, it’s a case of ‘just stand there’.
Who are they fooling?
The complexity of Financial advisory never ceases to amaze me. As an Independent Financial Advisor, it is one thing to keep up with all the different unit trusts/collective investments on a daily basis (like most advisors I have several dozen of the 1000 odd available that I watch carefully), but the small print is often exhausting. Regulations keep changing, and just when you thought you had it waxed, a clever tax consultant finds another wrinkle in the amendment (see tomorrow’s blog on retirement fund amendment and estate duty). When it comes to keeping up with all the life products, benefits and bells and whistles the providers keep adding and taking away to their product – if I get confused, how on earth can anyone who isn’t in the industry keep up?
When should you change your life policies?
Despite every effort by ASISA and other bodies, life policies seldom seem to have a life span of 3-4 years before they are swapped out to another provider – when is it valid, and when is it not?
Price: Over the last ten years premiums for life cover have become more competitive, and the providers will not automatically give you the benefit of the cheaper price. If the policy has been around since the 90’s then the ‘saving’ can be massive. Not all providers will allow an advisor to redo the cover on the same platform, and there is likely to be no remuneration. As an independent provider I continually make sure my client gets the best policy they can afford, tailored to their changing needs. If I don’t do that, someone else will.
Warning: If your advisor or a new advisor recommends that you ‘change’ your policy, ask these questions: