Risk and life insurance – a necessary evil or an investment in peace of mind

Patrick Sheehy, Head of Product Management at Glacier by Sanlam

“Life insurance is an investment in your family’s future financial security, and should not be seen as a grudge purchase,” says Patrick Sheehy, Head of Product Management at Glacier by Sanlam.

A family needs to know that its finances will be sufficient to maintain its standard of living in the event of the death, critical illness or disability of the main breadwinner.

Life cover

The purpose of life cover is to protect the financial well-being of your family in the event of your death. Some of the many considerations when evaluating the adequacy of your life cover include the following:

• When last your life cover was reviewed by a financial intermediary
• Changes in your family or business circumstances, your lifestyle or occupation since your life cover was last reviewed
• If your children’s future education will be guaranteed in the event of your death or disability
• How your debt will be paid off in the event of your death
• The possible reduction in your income should you be forced to stop working due to ill health.

Inflation may also result in your cover becoming insufficient over time. There are policies available that automatically provide for inflation-linked increases in cover. However, this should not replace reviewing your cover needs on a regular basis.

Disability

There are two main forms of disability cover, namely lump sum or income replacement benefits.

A lump sum disability benefit cover will pay out the sum insured in the event of you becoming permanently disabled. Because it pays out a lump sum it is ideally suited to covering outstanding debts and once-off expenses associated with the disability.

An income replacement benefit is designed to replace any reduction in income you might suffer as a result of disability. It covers permanent as well as temporary disability up until your normal retirement age.

The premiums you pay under an income replacement benefit are tax deductible, with benefit payments taxed as part of your income. By contrast, no tax is payable by you on any lump sum disability payment but the premiums you pay are not tax deductible.

Critical Illness cover

Critical Illness cover is designed to offset the expenses associated with a critical illness. Aside from the direct medical costs there may well be substantial expenses incurred during the recuperation period. Because the costs associated with different critical illnesses vary substantially, the Critical Illness benefits will vary according to both the type and severity of the illness. The amounts paid by different companies do vary so it is important that you understand exactly what level of cover you’re getting and what you’re covered for.

Life insurance should never be purchased on price alone. The range of conditions covered and corresponding benefit payments should always be looked at. A cheaper policy may have exclusions or limitations. In certain instances a more expensive policy, which is more appropriate for your needs, may be the wiser choice in the long run.

Given the amount of information to be considered and the complexity of the policies, it is recommended that clients consult a qualified financial intermediary. As stated earlier, life cover should be seen as an investment. When seen this way, it becomes obvious that it needs to be planned for and adjusted continuously to ensure peace of mind for the entire family.