Most people see the need for car and household insurance but may think that rather than paying premiums toward disability or dread disease cover, it would be a good idea to invest the money. But these so-called “long-term insurance” products are an essential aspect of financial planning. Here’s why.
Why long-term insurance is importantWhile investing is about growing your wealth ahead of inflation, insurance is about protecting you against those events that can have a devastating and lasting impact on your finances.
Think about it this way: If you’ve invested R1 000 monthly, and the investment grew 10% each year, you would have just short of R80 000 after five years. But what would happen if you suffered a heart attack that left you unable to work for a few months? One event can wipe out years of savings and leave you drowning in debt. Even worse, a car accident could leave you unable to earn an income for the rest of your life.
When considering these types of cover as part of a holistic financial plan, the aim is to ensure you have sufficient insurance for your unique circumstances.
The different types of long-term insurance
- Life cover will pay a lump sum or monthly income to your loved ones if you pass away.
- Disability cover will pay a lump sum or monthly income to you if you are no longer able to do your job – temporarily or permanently – because of an illness or injury. On average, the probability of permanent disability is low, but most people underestimate the probability of temporary disability and are therefore underinsured for such events.
- Dread disease cover pays out a lump sum if you are diagnosed with cancer or suffer a heart attack or stroke.
- Income protection will provide you with a regular monthly income if you are unable to work due to illness or disability, even when this is only a temporary inability. Income protection policies vary significantly depending on the product provider and the cover chosen. You need to assess your personal situation and the various exclusions and iterations of the insurance, to decide how to blend it with your life, disability and dread disease cover, particularly where you are already insured against these events through your employer’s pension fund.
- Funeral cover pays out a lump sum to your family to cover the costs associated with a funeral.
Getting the right cover for your needsTo ensure you have sufficient and appropriate cover, consider the following:
Your personal circumstances
If you are the primary breadwinner in your family or if you have substantial debt, it could leave your family in a difficult position if you die. Life cover is useful to settle amounts owed to your creditors if you pass away and to provide for the financial needs of your loved ones. Educational needs, the taxes that might need to be paid upon death and executor fees, should also be considered in these calculations.
If you are single and debt-free, you are not likely to need life cover, but you should still consider disability insurance and dread disease cover.
Be sure to adjust your cover as your personal circumstances change. As you get older, your debt usually reduces, your children become financially independent and you may need less life cover. However, this may not always be the case and if you are financially responsible for parents, a spouse or adult children, ensure that they would still be looked after financially if you should pass away.
The cover your employer offers
Many employers offer long-term insurance products (risk benefits) through the pension fund, often at a cheaper rate than consumers would have access to if they bought it themselves. This may include a death and disability benefit or funeral cover but will vary depending on the employer. Due to cost considerations, dread disease cover is usually not included, but there are exceptions.
Your income is your biggest asset
You probably think of your house or your pension fund as your biggest asset, but in fact your biggest asset is your ability to earn an income. If you were suddenly unable to earn – even if just for a few months – due to severe illness, injury or disability, this could have a significant impact on your finances and may leave you with an impaired credit record.
Beware waiting periods, fine print and exclusions
You may be tempted to choose risk cover solely on price. While it is important not to overpay, it is even more important to ensure the cover is appropriate and in line with your needs. Check what the waiting periods are. If you are involved in a serious car accident and are temporarily unable to work, but the policy only pays out after six months, you may struggle to cover your immediate expenses. Income protection may be a good solution for these scenarios as it will replace your income during periods when you are unable to work.
Also check policy exclusions. For example, most life insurance policies will only pay out in the case of suicide if two years have passed since the policy was signed.
Risk benefits are worth the costWhile insurance may feel like a costly expense, getting the most appropriate cover for your personal circumstances is vital to protect you from those events that can have a lasting impact on your family’s financial health.
The information contained in this document does not constitute advice. Should you need advice, it is recommended that you contact 1Life and request to speak with one of our high advice consultants.