Craig Harding
Rafieq Saville
Keeping your insurance cover relevant through changing personal and economic lifecycles is an essential part of the financial planning process. The expertise of a professional financial planner will ensure that the cover you have today and in future remains appropriate for your budget and individual circumstances.
“Managing your life portfolio is a dynamic process and you should be meeting with your broker annually, or at the very least every second year to ensure that the cover you have in place still suits your personal circumstances. Life changing events such as marriage, the birth of a child, property ownership, a career change, divorce, serious illness and retirement all have an impact on your risk profile,” explains Craig Harding, Managing Director of Altrisk. “You need to weigh up your options in terms of your available budget against personal factors such as lifestyle, dependents, outstanding debts, health conditions, employment and heredity factors.”
Rafieq Saville of Professional Financial Solutions offers the following advice based on a practical example and how it impacts on financial planning decisions:
Meet Harry...Young graduate professional, has just started his first job, rents a townhouse and currently has no dependents. Harry has medical aid cover through his employer.
“Life cover is probably not an absolute requisite right now as Harry has no dependents and since he rents, he has no major outstanding debt in the form of a bond. However, he still has day-to-day living expenses he needs to cover. His first priority should be disability cover – both lump sum to cover immediate expenses as well as an income replacement benefit to cover his salary should he take ill or be involved in an accident that could lay him off work for an extended period of time, or even permanently,” explains Rafieq.
It would be a good idea to look at critical illness cover, even at this young age. The sooner you have CI cover in place the better - if you’re unlucky and suffer poor health and don’t have this cover in place, you may not be able to get cover afterwards. Planners no longer wait for their clients to reach a ‘mature’ age to put critical illness cover in place. The fact that a client in their late twenties is healthy is no reason to not cover them for critical illness, especially when one looks at statistics for cancer and heart disease claims - people are being diagnosed at far younger ages than they were 20 years ago. Much of the reason for this is said to be attributable to stress, which in recent years has seen a marked increase in not only the work environment, but also in the home and social life. The reality is that life-changing eventualities, whether stress-related or other, knows no age-limit. So, you are never too young or healthy to set in place protection.
“If Harry is healthy and has no family history of hereditary disease, he could consider a basic critical illness benefit that covers cancer, heart attack, stroke and Coronary Artery Bypass Graft (CABG) only - interestingly, these conditions make up between 75% and 90% of all critical illness claims.
“However, it is important to remember that disease does not confine itself to those who have a family history of it. Ideally, you would want to cast your safety net as wide as possible and the best time to do this is when you are young and healthy, as then the cover is usually also easier and cheaper to acquire.
“When guiding young adults at the start of their financial journey, I liken effective financial planning to building a home. Most people dream of building a multi-story mansion to call home and there is nothing wrong with that, provided that the foundation set in place is solid enough to hold what is built on it. Your risk insurance should be seen as your foundation, so make sure that you take care of this first and that you do it in a way that provides effective financial protection against virtually any eventuality,” explains Rafieq.
Often, young adults in a similar position to that of Harry prefer to invest in unit trusts as opposed to first acquiring risk insurance, as it is seen by most as a grudge-purchase and something that should be left for when they have ‘responsibilities’. “Most people miss the fact that at this stage they indeed already have an important responsibility - to ensure that they are able to sustain themselves financially should they suffer a life-changing event. Even if Harry had taken this common stance and accumulated, say R100 000 in unit trust savings after two years and then became disabled, the likely outcome is that he would immediately have to start living off these savings. Very soon he would be without both - savings and, more importantly, the means to further sustain himself,” warns Rafieq.
“Retirement planning should also start as early as possible – ideally, Harry should be looking at an appropriate retirement savings vehicle as soon as he starts his first job. The longer you save, the higher your compounded growth on your investment and the better your standard of living in your golden years is likely to be.”
Harry meets Sally...They get married, buy a house, splash out on furniture, appliances and expand their asset base, along with their financial liability and finally look forward to the arrival of Harry Jnr.
“Life cover becomes an absolute must at this stage and most likely the bank would have required this as security when Harry and Sally applied for their bond. Since both Harry and Sally bring in an income to support their family and lifestyle, both of them will need to have life cover in place to pay off any outstanding debts as well as provide financial support for their family should either of them die prematurely. It’s also a good time to consider a practical benefit such as Altrisk’s monthly death income benefit which provides clients with the certainty of a regular, monthly income for their beneficiary without the risks associated with investment returns or the effects of inflation related to managing lump sum payments. The monthly death income benefit provides certainty around the amount of income that would be available to meet the regular month-to-month expenses such as school fees, car repayments, medical aid cover and so on,” explains Rafieq.
In terms of Critical Illness, Disability and Income Protection covers, both Harry and Sally need to relook at their benefit amounts as their needs and the cost of living will be significantly higher than when they were single and without dependents. Should they not be able to work in the short or long term, they need to know that their standard of living can be maintained and their assets are secure.
“Budget permitting, Harry and Sally should also look at increasing their retirement contributions and working towards ensuring that their major liabilities such as bond and car repayments are paid up well before their retirement age. In addition, given the costs of medical aid, Harry and Sally need to make sure that they have enough money in their retirement funds to afford this vital monthly cost throughout retirement,” explains Rafieq.
Poor risk planning could negatively affect their retirement planning from a funding point of view - in the event that either of them became ill or disabled they would most likely be unable to pay the monthly premiums for their retirement products. An income replacement or disability plan assists in mitigating this risk and ensures that their retirement planning does not become impacted by an inability to service the monthly premiums.
Harry Jnr leaves the nest...It’s the time virtually all parents treasure the most after the birth of their child – Harry Jnr has grown up, left the nest and is embarking on his own career. With the cost of schooling and varsity fees behind them, Harry and Sally purchase a second investment property with the spare cash.
“Harry and Sally now have two property assets in their joint estate. It’s essential that they make allowance for capital gains tax, executor’s fees and estate duty on the value of their entire estate and this is often best done by either upping the value of their existing life cover, or taking out a separate life policy. Failure to do this could see the executors dipping into the funds intended for beneficiaries or even worse, selling off assets to cover these estate-related costs,” says Rafieq.
Looking forward to those golden years...Harry and Sally really can look forward to a comfortable and secure retirement.
“When taking out critical illness cover, it’s best to go for a ‘‘whole of life’ critical illness plan which is of great benefit to safeguard against the cost of an illness eating into retirement funding. Without this option, if either Harry or Sally were to suffer a serious medical condition in their retirement years, the potential costs of care and treatment could be substantially more than they had originally budgeted for in terms of a ‘healthy retirement,” concludes Rafieq.
Craig Harding of Altrisk adds: “Throughout life you need to be reviewing your risk and insurance portfolio along with your scale of benefits of your existing covers. Arrange to meet your broker once a year and review your portfolio and make amendments, upgrades and even downgrades if necessary. When it comes to your financial planning there are three indisputable realities that you need to consider: You are either going to live too long, die too soon or get sick in between. An experienced, professional broker is an asset when it comes to navigating your risk portfolio and ensuring that you and your family are taken care of through all of life’s ups and downs,” concludes Craig.
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