Understanding Your Risk Cover

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Insuring yourself against the loss of life or a loss of income is an important part of financial planning, and everyone should have this cover in place. Whether it is done through an employer group scheme or through an independent insurance provider, it is important to understand the risk benefits that you have in place and what some of the terms mean.

Life cover

Life cover provides a lump sum benefit in the event of death. The purpose of this cover is either to settle liabilities that may still be outstanding when you pass away, to provide for your family’s lifestyle and education needs until they are independent, or it can provide liquidity in your estate. In some cases, the life cover needs to provide for all three of these needs, meaning that a large amount of cover is required.

As one gets closer to retirement, the need for life cover may also reduce if you have sufficiently provided for your retirement years and as your dependents can start providing for themselves. It is important to discuss this with a financial planner in order quantify these requirements to ensure that you are not under or over insured at any stage in your life.

Disability cover – capital and income

A young individual’s greatest asset is their ability to earn an income, which should be protected in the event that they are no longer able to work due to sickness or disability. Income disability cover is one of the most important types of risk cover while you are still working and building up a portfolio. This provides you with temporary income replacement in the event that you are unable to work due to an illness or physical injury that you can recover from. Should you become permanently disabled, it then provides permanent income replacement, which pays out a percentage of your gross salary until retirement or a selected date.

Disability cover can also be provided in the form of a lump sum which is paid out in the event of permanent disability. This lump sum amount can be used to make adjustments to your home and vehicle to allow for wheelchair access and other needs that a disabled person may require.

Disability benefit aggregation

Disability cover is intended to replace the insured individual’s pre-disability earnings. As these benefits can be received in the form of a monthly income or a lump sum, aggregation is applied to limit the post-disability income benefit to a maximum percentage of the pre-disability income. A formula is applied to both the income and lump sum disability benefits to determine if you are in a better income position than the maximum benefit, i.e. the percentage of your gross salary.

If that is the case, your payout is adjusted accordingly. It is important to ensure that you are appropriately covered to avoid over-insurance and avoid paying higher premiums for cover that cannot be fully paid out at claim stage. There are some providers who do not apply aggregation at all, so it is also important to establish how your policy works and the aggregation terms and conditions of the provider you are insured with.

Critical illness

Critical illness cover provides lump sum benefits in the event of a severe illness such as cancer or heart disease, etc. Most providers have a set list of illnesses that are covered, and depending on your health records and family history, some illnesses may be excluded if the risk is too high. The payout amount is also linked to the severity of the illness, where a higher percentage of the benefit may be claimed for more severe illnesses. These exclusions and payout conditions will always be included in the terms of the insurance contract.

Accelerated vs standalone benefits

An accelerated benefit is a life policy feature which allows the policyholder to receive a portion of their life cover while they are still alive, either due to disability or a severe illness. In other words, your disability lump sum benefit or critical illness benefit may be included as a “rider benefit” on your life cover.

In the event of a severe illness or disability, the lump sum amount paid out reduces the life cover benefit that is payable upon death. Standalone benefits on the other hand do not affect or reduce the other benefits should a claim payout be made. The premium for standalone benefits is usually higher than accelerated benefits.

Approved vs unapproved death benefits

Approved death benefits are offered within a retirement fund, usually through an employer group scheme. Because of this, the payment of these death benefits is subject to section 37C of the Pension Funds Act, meaning that the trustees of the fund have the responsibility of determining who your dependents are and to distribute the death benefit accordingly. This payout is then also subject to tax, which is calculated based on the Retirement Fund lump sum benefits tax table and is taxed in the hands of the deceased member.

Unapproved death benefits are provided outside of a retirement fund by an independent insurance provider. These benefits are paid out tax free to the beneficiaries nominated by the deceased. It is important to determine whether your death benefits are approved or unapproved as the tax consequences as well as how the funds will be distributed can have a serious impact on your estate plan.

There are many providers who offer life and risk cover which can be structured in many different ways, and while sometimes at first glance one policy may the look the same as the other, there are also small differences from one provider to the next. It is important to work with a financial planner who can assist you to understand your risk benefits and to ensure that you are appropriately covered.

By: Lana Visser, financial planner, Fiscal Private Client Services, see www.fiscal.co.za

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