Do you have the right risk cover?

Neill Katzeff

The end of a year is a good time to check that you have the right risk cover for your needs, and put plans in place for the new year if you don’t.

For example, far too many young people have life insurance they don’t need, while overlooking the need for income replacement cover to protect them in case their income dries up through illness or an accident that results in disability.

This is according to Neill Katzeff of Mazars Financial Services who says many young people with no dependants still follow the tradition of buying a life policy as soon as they start working. They choose the wrong cover at the wrong time of their lives, he says.

“Statistics show that if you’re under 26 you’ve got 80% more chance of becoming disabled than dying because of your lifestyle. Therefore protecting your income at this stage should be a priority.”

If you’re 26, unmarried and have no dependants, income protection cover is absolutely crucial, and should be taken at the maximum rate, which means about 75% of current income, Katzeff says.

He says dread disease is, of course, good to have especially now as young people are increasingly besieged by various diseases such as cancer, stroke and heart disease. But affordability is an issue and dread disease should not be given priority over income protection.

Only as you grow older, get married and have children does life cover becomes important, he says. Or if you have an estate that you want to protect against debt, CGT and estate duty.

Katzeff says to determine the amount of cover you need, a rule of thumb is that it takes R2.4 million to fund every R10,000 per month of income that your family will need, without using up the capital and allowing for inflation over a 30 year period. This assumes an annual return of 10% on your investment and inflation of 6%.

Another trap to avoid is taking a policy with investment and risk cover bundled together. Such policies were popular in the 1980’s and 1990’s but have proven to be the worst place to save.

“Imagine having R3 million life cover and a cash value of only R600 000 after 20 years of contributing premiums. On death, 20% of the payout is your own money so in essence it would be better to have the savings element in a different investment, and pay a lower premium for the cover.”

Katzeff says people must carefully consider their reasons for taking life cover. Many policies have dread disease cover and lump sum disability cover as an accelerated benefit. This means that if you have R1 million life cover and R1 million disability cover, when you become disabled they’ll pay out the disability and you’ll no longer have life cover.

“The moment one of the accelerated benefit events happen, like a dread disease or disability, your life cover reduces by that amount,” explains Katzeff.

At retirement stage, Katzeff says disability cover should be abandoned in favour of dread disease as your retirement portfolio will provide for income anyway. Dread diseases are more likely to occur in older people and can result in a substantial financial burden, particularly as medical aids no longer pay for all the associated costs.

Katzeff advises that before you embark on taking out risk cover, a proper financial needs analysis should be done. “Adjustments to your plan can be made as you progress through the various life stages.” Also, risk benefits should be revisited every two years, or in the event of any lifestyle changing detail. This ensures there is sufficient cover and that premiums being paid are still competitive. This applies to accelerated benefits such as disability and dread diseases as well.

“Bear in mind that there are packaged offers from insurers that give discounts and premium paybacks on loyalty and state of health. Test results are given back to the insurer each year to increase your status for these discounts and paybacks. Some of these incorporate a credit card. But clients should contact their brokers for a full explanation before embarking on this road.”

He suggests that, if you’re young, what you pay for risk cover should be much lower than what you pay into investments. As you grow older, however, this equation should start to move in the opposite direction.

“By the time you retire you should be paying very little if any for risk, including life cover, and paying a lot towards your retirement and dread disease. That’s a perfect world,” Katzeff concludes.