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The importance of risk cover

Risk cover ensures you and your family will have an income should anything happen to you.

Many employees, self-employed individuals and commission earners are seeing a significant drop in income as a result of the impact of the coronavirus. We hope this will be a short-term event, but the financial impact is likely to be felt for some time.

The question to ask is if you cannot work for a few months as a result of a health event like contracting the coronavirus, cancer or an event such as a car accident, what funds do you have to cover your commitments such as medical aid, life insurance or the bond? Will you be financially ruined? You may be forced to sell your home and now is not a good time to sell.

Claims statistics by Financial Management International suggests that in our working lifetime 70% of us will experience an injury or illness for longer than 14 days that will prevent us from earning an income. My recommendation is that you protect your income first.

During this time of the coronavirus, it is important to have income protection cover. Income protection is there to protect you as a result of an illness or an accident. The benefit pays out following the selected waiting period. As a practical example, many of our clients who are professionals or self-employed individuals such as; business owners, lawyers, accountants or doctors have a seven-day waiting period on their cover and in the event of them being diagnosed with coronavirus or being classed as a person under investigation and placed in isolation, a claim will be paid from day seven for the time they cannot work.

It is important to note that income protection cover is not designed to pay as a result of a salary cut or drop in income due to a drop or closure of a business. Some clients may have retrenchment cover which pays out a set amount for six months if they are retrenched but not if they accept a voluntary severance package. Most insurers have withdrawn retrenchment cover.

Many clients have asked, “Can I request a premium holiday on my life cover or perhaps cancel it and take out a new policy when my situation improves?”

Firstly, do not cancel or reduce your cover before speaking with your advisor who can assist you to restructure your risk cover to prioritise what cover is important right now. Secondly, if you cancel your cover, apart from the fact that your dependents are not protected, you may not be able to get new cover at the same rates as you are on now when you’re older or have health problems. This is especially true if you have an older policy. It is important to note that should someone die from the coronavirus all life insurance and funeral policies would pay the claim, so you may want to keep this cover in place, if possible.

There are no premium holidays, but with some of the older traditional life policies which have built up a cash value, you may be able to use the cash value to fund the premiums. This varies between various insurers and you need to obtain clarity on this before making the wrong decision.

To assist clients in this time, most insurance companies are providing clients with the opportunity to reduce the cover and premiums by an average of 50% for three months after which the cover automatically re-instates without new medical evidence. However, you must apply for this benefit.

As a last resort to assist clients, life insurance policies normally lapse after two premiums have been missed. On average, this has now been extended to three months where even though the premium has not been paid the client will remain on risk. At the end of the three months, an arrangement will have to be made to pay the arrears. It is not ideal but at least your family is protected in these three months.

If you are concerned that life insurance will increase your premiums because of the pandemic, in my experience life insurance rates are usually guaranteed for 10 years and with some insurers for as long as 15 years from the date of inception of the policy. At the end of the guarantee period, if the insurance company has had a poor claim experience, they can then only increase rates by a maximum of 20%. In this event, the insured can at that time accept the increase or reduce the cover.

Some clients have also asked if they should take out any extra cover at this time and I would recommend the following for consideration:

MI claims stats – temporary disability

In the event of your death, it is advisable to ensure that debt is settled and there is a lump sum to generate an income for your dependents. By example, if your spouse has R1 000 000 and draws down an income at a rate of 5% per annum the monthly income would be R4 166 per month before tax. Similarly, a lump sum of R5 000 000 would generate an income of R20 833 per month. If this income is not sufficient then you need to increase your cover in line with your long-term goals and budget. Life income is a cover that should also be discussed with your advisor as it is often more affordable than life cover. Life income pays a tax-free monthly income to beneficiaries until a selected age. It also alleviates fears of a lump sum being squandered.

As an industry, we are open for business. Typically, income protection up to R40 000 a month, R5 000 000 life insurance and lump sum disability and R2 000 000 severe illness cover can be issued where the requirements are just blood tests and there are no significant pre-existing conditions. At the moment the insurance industry nurses and doctors are not permitted to travel to collect medicals, but the insurance companies will issue the cover provided the blood tests are done after the lockdown is over. Clients will be on risk, but the terms may be reviewed based on medical evidence.

In closing, please be sure to speak to your advisor before making any quick decisions. Make sure you know what cover you have and that the beneficiaries are correct as this cannot be changed if you’re no longer around. Make sure you have a valid and up to date will in place. As an industry, we are proud of our role in society and are there to help you in the good and especially the bad times.

ADVISOR PROFILE

Michael Haldane

Global & Local Investment Advisors

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