Almost everything we buy today, offers endless choices, as well does life insurance, disability insurance and critical illness cover. The following points should, however, provide you with a guideline to your decision-making when taking out this insurance.
I hereby briefly point out some important issues to remember when considering life insurance policies and it does not necessarily apply to any specific individual’s life insurance policy.
1. Price / premiums and refundable bonuses.
The premium for insurance is determined by the risk pool (all premiums paid by the insured pool measured against the possibilities of claims against). That’s how insurance was established in the first place. If a company pays bonuses or refund a portion of premiums after certain periods, they ask in the first place too much for the insurance or they may not necessarily provide the same quality cover. Money does not fall from the sky.
2. Premium Patterns: Level or Compulsory Growth
Suppose you take a policy to insure your life for R1 000 000. You can choose as an example to pay R600 per month, but the premium has to increase by 10% annually for the cover to remain R1 000 000, or you can pay a premium of R1 000 per month unchanged as long as you have the policy. Over a period of 30 years the R600 plus 10% premium will cost you R1 184 356.96 in premiums and the R1 000 unchanged premium will cost you R360 000. Therefore R824 000 more could have been saved for a better retirement.
3. Level premiums with voluntary annual increases
If you have a comprehensive estate and financial planning done so that all your liabilities will be redeemed when you die, and you have made sufficient provision for studies for children, an emergency fund, possible replacement of vehicles, etc. and to provide for an acceptable income and medical premiums for your family, then your life cover does not have to increase, nor your premium, because the older you get, the less life cover you need to meet those financial expenses.
However, if you decide to increase the premium voluntarily annually so that your cover also increases, you can still stop the increase in premiums and your cover remain then unchanged. If you do want your cover to increase by 7% per annum, the companies often will increase your premium by 10%. After 25 years in the industry I am still waiting for the correct answer. Suppose your premium starts at R1 000, it increases by 10% annually (R1 973 928.27 premiums payable over 30 years) and your cover increases by only 7% (R1 133 529.44 value of the cover premiums
payable over 30 years) there is 3% ‘increases annually over 30 years of R840 398.84 (R1 973 928.27 less R1 133 529.44) of which the value added is being questioned.
4. Loss of retirement savings because of wrong choices with premium patterns
From the examples of paragraph 2 and 3 the right choices can make an astronomical difference in funds that you could have used to save for retirement, remember the amounts were the physical premiums saved and no interest or return were included in the savings mentioned.
5. Fringe, standalone versus accelerators
Life insurance with fringe benefits such as disability and critical illness cover can be taken out as accelerators or standalone benefits. Suppose you take a policy with R1 000 000 life insurance, R500 000 disability and R250 000 critical illness cover.
As accelerator: Suppose you have a stroke, then the company pays a claim of R250 000 as dread disease, mostly after you have survived the disease after 14 days. It will then reduce your life insurance to R750 000. Therefore, if you permanently become medically disabled because of the stroke, you may then qualify for the R500 000 disability benefit, and your life cover will then reduce to R250 000.
If standalone: Your life cover will not reduce if you claim the R250 000 critical illness benefit and not if you claim the R500 000 disability benefit. It will remain R1 000 000.
6. Guarantee periods
Insurance companies guarantee premiums for periods of 10 and 15 years usually under normal circumstances. We have received letters from several companies on behalf of clients where their guarantee periods have expired, and premiums sometimes had to be increased by up to 40% and even more to be able to keep the cover or the cover will be decreased by up to 40% or even more if the client continue with the same premium. However, there are some companies from whom we have never seen or received such a letter.
7. Occupation, Smoker or Non-smoker and work in the Foreign Countries
When a quotation is prepared for life insurance, the following information are required:
- Your name and date of birth
- Your income per month or year
- Your qualifications
- Your occupation
- What percentage of your day you spend on administration, supervision, physical work and travel.
- Are you a smoker or not?
- Are you working in South Africa?
During the application, there are still questions like hazardous activities and medical questions that must be completed.
Several companies do not offer cover for certain occupations, so if you change your occupation, you should notify the company of the change.
Smokers pay considerably more for life insurance than non-smokers, if you quit smoking, you can notify the company and, in most cases, they will decrease your premiums. However, if you had been a non-smoker and started smoking again, you must notify certain companies to keep your cover, and some will increase your premiums.
Some companies do not offer cover or will suspend cover while you work in certain countries, whether permanent or even temporary, and it is generally advisable to check in advance if you are going to work abroad.
8. Quality of coverage
Make sure what the company covers from whom you buy insurance from and make sure what the policy covers. Many people buy life cover that only covers if you die because of an accident or become disable as a result of an accident, or even buy policies that covers the insured only against cancer but ignoring some other major severe illnesses. Compare this to companies that provide cover no matter how you die or which severe illness you might be diagnosed with.
9. Age at inception of policy
In addition is life insurance premiums determined by your age, a 30-year-old person will pay less for the same cover as a 40-year-old person. Suppose you have a policy you took out at age 30 for R1 000 000 life insurance, but now you need additional cover of R1 000 000. Our advice is to ask for two quotations, one to increase your existing cover on the same policy of R1 000 000 to R2 000 000 life insurance and ask another quotation to take just another R1 000 000 life insurance policy and compare the total premiums of both options. Many companies allow you to pay the 40- year premium on all R2 000 000 if you change the existing policy.
The same goes for a policy that I had with R2 000 000 severe illness cover and I wanted to reduce the cover to R1 000 000, the premium was about R2 100, the amended quotation premium was about R1 400, and not as would be expected R1 050, exactly half. When questioned, they replied that I am older now and that would now be the price for the cover of R1 000 000. Be extremely careful when someone recommend you change your existing policy.
10. In summary
Do not buy life insurance without a financial plan and ask for a document which addresses all these points and make sure there is a motivation for the company and product selected.
Sincerely