Risk benefits: Protecting lifestyles

The death of a spouse could have a devastating impact on the lifestyle of the surviving family members. Risk benefits can be used effectively to reduce the impact.

Apart from the emotional impact of the death of a spouse, there could be a significant, if not catastrophic, financial impact if proper risk cover is not in place, comments Patrick Sheehy, Head of product management at Glacier by Sanlam.

Severe lifestyle changes

“For example, the death could have a significant impact on the monthly income of the family which could result in the family being unable to maintain bond or other loan repayments or pay school fees, medical fees or other expenses. Ultimately this could lead to the family being forced to sell their home, or worse still, have the home repossessed, move their children to other schools and stop medical aid payments. All of these financial hardships can be avoided if the appropriate amount of risk cover is in place.”

More than income gaps

“In the current environment, it is increasingly common for both spouses to work and contribute income to the household,” notes Francesco Joshua, Head: Risk Solution, Metropolitan Employee Benefits. “If either parent passes away, there will be an income gap, and unless the family is spending far below their means, there will be a shortfall.

"There are also further elements relating to increased responsibilities of the surviving family members. In single-income families, often only the breadwinner takes out cover to replace his/her income on death. The additional expenses that will have to be incurred if the non-working spouse dies, are often forgotten.

“Besides the loss of income, there is also estate duty that would need to be paid on the deceased’s part of the estate. If there is no life cover on a spouse’s life, then there may not be sufficient liquid assets to pay the estate duty, as all the money may be locked into the value of assets such as the house and cars.”

Addressing the risk

“An intermediary’s role is to help determine the most cost effective way of structuring benefits to achieve a client’s planning goals. Essentially, brokers need to evaluate what the impact of the loss of a spouse will be on the client’s financial planning,” says Craig Harding, Managing Director of Altrisk. “Then the products and benefit structures that best meet the client’s needs must be found. This could include lump sum capital to settle debt and other financial obligations, and income benefits to meet expenses on a monthly basis.

“Simply demonstrated, if a breadwinner dies or becomes permanently disabled, what funding would a spouse or partner need to cover key debts such as the house, cars and other assets? This is where a lump sum benefit is important. Then, consider how much cover you would need to meet monthly expenses – an income benefit would come into play here. In a dual income household, you could base the cover required for each partner on their relevant contribution to the household income and plan accordingly.”

Regular review

“Of course it is not a simple exercise to determine just how much cover should be in place, but an accredited financial intermediary will have the required training, expertise and tools to determine the appropriate amount of cover,” says Sheehy. “The key, however, is to ensure that the financial plan is reviewed on a regular basis so that cover amount keeps pace with the family’s changing needs.”