The death of any loved one is an extremely testing ordeal and the last item on any family’s immediate agenda is long-term financial sustainability. However the importance of this is underestimated in most cases. The grieving process is long and arduous but without sufficient life cover it may become insufferable for those left behind. Thus the lack of adequate life cover, within any family unit, is virtually inexcusable. Leaps and bounds made in the insurance industry have meant that cover can be tailored and not necessarily at the demise of one’s wallet.
Combating Erosion
The life cover amount on your life policy represents the amount to be paid out to your dependants in the event of your death. The sole purpose of this lump sum amount is to provide your dependants with sufficient income to maintain a reasonable lifestyle. This may seem simple enough but let us not forget the eroding effects that inflation will have on the amount paid out (assuming it was invested in order to provide dependants with an ongoing income). If one was to assume that long-term annual inflation was 8%, this will then mean that your loved one’s standard of living will diminish by this amount annually, assuming a static income. So the performance of your dependants’ investment portfolio needs to grow by 8% just to break even each year. Any growth then created by their financial advisor, over and above the rate of inflation, will diminish the lump sum ultimately needed but more importantly will reduce the burden placed on the insured. But relying on increased investment performance to sustain dependants rather than ensuring adequate life cover to begin with, can prove to be a grave error. New developments in the life cover industry have created improved benefits for the insured yet many of those with older policies are unaware of the benefits available at no extra cost.
The Importance Of Adequate Cover
So how much cover is needed? A basic rule of thumb often used is that it is ten times the breadwinner’s annual income. So for a person earning R10,000 a month, the minimum life cover needed, using this rule would be R1,2 million. Putting this in context however, makes the demands on the lump sum become evident.
Example:
Total Cover R1,2 Million
Less Assumed Expenses:
Outstanding Bond R240,000
Income Tax on death R20,000
Outstanding debts R50,000
Miscellaneous R8,000
Hospital etc. R13,000
Funeral Expenses R20,000
Remaining lump sum R849,000
The remaining amount now needs to provide for your family’s general living, education and any unforeseen expenses. In this case R849,000 is hardly adequate to meet the needs of this family, even in the hands of an expert financial advisor. Assuming a 10% rate of return net of income tax and ignoring inflation, the family would only earn R7,075 per month, 30% less than they had been accustomed to living on.
Improved Life After Death: New Generation Cover
In terms of life insurance, there are three major risks faced by any one individual, which need to be accounted for due to their inevitable poor timing. They include disability, the onset of a serious illness, and of course the threat of death. There has however been a major swing from traditional “Universal Life Cover” (which included both a savings and a risk element) to what is now known as “New Generation” cover. But for what reason you may ask? Universal cover proved to be fundamentally flawed for various reasons and it was these flaws, which led to the birth of New Generation cover. It is generally now agreed by the market that it is better to leave investing to an investment product and risk assurance to a life assurance product.
New Developments Means Money Saved
With new generation policies, your entire premium goes towards risk cover only, and the premium is not directed towards an investment element. The investment element was compulsory in terms of Universal cover, and it was this element of Universal cover that led to the creation of new generation cover as the investment element was usually lost on death. It gives you the freedom to buy what you need and not what you have to.
The major advantage gained in cover with new generation products, is the advantage of standalone death, disability and dreaded disease benefits. Standalone cover is slightly more expensive but the benefits are superior in the cover offered. Standalone cover allows one to differentiate cover. If you are insured for both death and serious illness, then you will be paid out for both, regardless of when they should occur. In the case of what is known as accelerated cover, if one is to become seriously ill, one will be paid out in terms of the cover for the serious illness but this will then correspondingly detract from the life cover amount.
Same Premiums, Improved Cover
New developments, better life cover options and underwriting methods, cheaper premiums and improved benefits in terms of life cover means that anyone who has traditional life cover is well advised to assess his or her current cover and restructure their insurance portfolio if necessary. Cover is now cheaper and for the same premium one can often afford more cover. The great majority of people’s life cover policies are inadequate, but through prudence and foresight one can improve one’s standing and not necessarily incur major costs in doing so. Don’t be found wanting and leave those closest to you with more than just memories.
