There is an enormous range of products that fall within the ambit of long-term insurance, together with a vast number of insurer service providers – very often making it difficult to navigate this area of financial planning without the help of an expert. Further, insurance products can play different roles and achieve a variety of purposes as one moves through different life stages, and the structuring of these solutions is essential to ensuring that your objectives are achieved. In this article, we unpack how various long-term insurance products can be used in each life stage to achieve optimal results.
At the outset of your career – assuming you are single and do not yet have financial dependants – an income protection benefit is likely to be the most important type of insurance to put in place. The purpose of an income protector is to ensure that you will continue to be paid your nominated income in the event of temporary or permanent disability until you reach retirement age.
While it may sound simple, income protection is a highly technical area of insurance and applicants generally undergo stringent underwriting before securing a benefit. During the underwriting process, the insurer will take into account the nature of your occupation, whether you engage in any dangerous activities, your age, health status, whether you have any pre-existing conditions, your smoker status, previous operations or procedures you might have had, as well as your family’s history of disease.
Your youth and health during this life stage will be advantageous in helping you secure more favourable premiums and better underwriting outcomes, so it is generally advisable to take out this form of insurance as soon as you start earning. As your income protection benefit is linked to your actual earnings, you will need to review your cover as and when your income changes to ensure that your cover remains appropriate and that you do not find yourself inadequately insured. It is also important to ensure that your income protection benefit is linked to inflation so that your benefit keeps pace with inflation each year.
When buying a property financed with a home loan, it is likely that your home loan provider will insist that you have life cover to the value of your bond. This type of cover is designed to ensure that there is sufficient liquidity in your estate to pay off your home loan in the event of your death and, while many banks insist on this cover, keep in mind that you are not obliged to purchase the cover offered by your bank. It generally works out more cost-effective if you shop around for your own life cover, or add life cover to your existing income protection policy. In the process, you may want to consider taking out a capital disability benefit to the value of your bond which will enable you to settle your home loan in full should you become disabled.
Getting married will require a review of your and your spouse’s risk cover to ensure that your objectives are met and that each of you is adequately provided for in the event of a tragedy. You may want to consider taking out a joint life policy which can be tailormade to provide the exact levels of life, disability and/or dread disease cover required by each of you, and often the premiums on a joint life policy are more cost-effective than those of two standalone policies.
When it comes to beneficiary nomination, keep in mind that Section 4(q) of the Estate Duty Act provides that the value of all property accruing to the surviving spouse is deductible from the gross estate of the deceased’s estate. This means that where you and your spouse nominate each other as beneficiaries to your respective life policies, the proceeds will be paid directly to the surviving spouse and will not attract estate duty nor executor’s fees.
When calculating the quantum of cover you require, you will need to take into account the value of your home loan, any other debt such as vehicle or credit card debt, future financial provision for each other, and estate liquidity. At this point, you may want to consider including some dread disease cover onto your policy which is designed to provide a financial buffer should either of you be diagnosed with a life-threatening illness.
There is no rule of thumb when it comes to determining the right level of dread disease cover, although it is generally advisable to take into consideration the level of medical aid and in-hospital cover that you have, whether you have gap cover, as well as the level of capital disability and income protection that you have in place as these will all serve to reduce your financial risk in the event of a severe illness.
During this life stage, securing sufficient life cover to provide for the future living and education costs of your children will be of paramount importance, although the structuring of such cover is important when it comes to achieving your estate planning goals. Where the proceeds of a life policy are intended for the future care of your minor children, think twice before naming your minor children as beneficiaries on the policy. Keep in mind that, because children under the age of 18 are not legally capable of inheriting, any funds bequeathed to them will be housed and administered by the Guardian’s Fund on their behalf. Not only will these funds be subject to less than efficient administration, but the investment returns achieved are likely to be less favourable.
To avoid this happening, consider setting up a mortis causa trust in terms of your last will and testament and nominating the trust as the beneficiary to the life policy intended for your minor children. By nominating your minor children as beneficiaries to the trust, the proceeds of the policy will be paid directly to the testamentary trust in the event of your death, whereafter your nominated trustees will administer these funds in the best interests of your children after you have passed. When setting up such a structure, give careful thought to the trustees you appoint to look after your children’s interests, and consider nominating alternate trustees in the event that one or more is unavailable at the time that the trust is formed.
Finding formal employment generally always requires a review of your long-term insurance cover, especially where your new employer offers group life and disability cover. When it comes to underwriting, employers benefit from group underwriting as opposed to individual underwriting and this, in turn, generally has a favourable effect on premiums. This means that if your employer offers good life and disability benefits, you may be able to reduce the cover that you have in your personal capacity and achieve some savings on your premiums.
Important to keep in mind is that group life cover is generally offered as a multiple of your annual earnings (for instance three times your annual income) which means that it is not based on your specific financial objectives. As such, it is always advisable to perform your own life cover calculations based on your specific objectives to ensure that the group life cover on offer meets your needs – and do not cancel any personal life insurance before being absolutely sure that you no longer need the cover.
It is also advisable to ensure that your group risk cover offers a continuation option before cancelling any cover in your personal capacity. A continuation option requires the insurer to continue providing you with the cover after you leave your employer, albeit at the premium they would charge you as an individual, with the main benefit being that you are guaranteed insurability even after having left your employer.
If you own shares in a business together with other shareholders, it is advisable to put what is termed buy-and-sell cover in place on the lives of the shareholders – specifically where you have a large portion of your wealth invested in your business interest and have incorporated the value of your shares into your estate planning. Buy-and-sell insurance is designed to ensure that the surviving shareholders are in a financial position to purchase your shares in the event of your passing so that the proceeds can go to your intended heirs.
Buy-and-sell insurance entails taking out life cover on each shareholder’s life based on the value of the company and in proportion to their shareholding. If correctly structured and supported by a business assurance agreement, the proceeds of a business assurance policy will not attract estate duty in your deceased estate. This is because the proceeds of business assurance policies are not considered deemed property in a deceased estate and provide an exception to the general rule when it comes to calculating the dutiable estate. To qualify for such an exemption, you must be a shareholder in the business at the time of death, and the policy must be taken out with the specific purpose of purchasing your business interests in the event of your death.
When it comes to funding for retirement, the role of disability cover is often overlooked when making provision for one’s retirement investments. While an income protection benefit plays a valuable role in protecting the income needed to cover your living expenses if disabled, it is important to give consideration as to how you will continue saving for your retirement. When developing your retirement plan, it is always a good idea to develop a disability scenario to help quantify the capital amount you would need on disability which, if invested appropriately, would be sufficient to provide an adequate post-retirement income for you – and then to secure this amount in the form of lump-sum disability cover.
During your wealth accumulation years, long-term insurance plays an essential role in protecting yourself and your loved ones in the event of death, disability and/or severe illness, especially when it comes to settling debt, providing for estate liquidity, and providing for your surviving spouse and children. That said, it is important that your long-term insurance be viewed as part of your overall estate plan to ensure that it is appropriately structured and aligned with your goals, taking into account the various tax, CGT, and estate duty implications of such cover.
Also, as your net worth increases and your debt reduces, it is important to review your long-term insurance to ensure that you are not paying for cover you no longer need. For instance, as your home loan reduces you may want to consider reducing your bond cover accordingly. Similarly, as the value of your retirement funding assets grows, you may be in a position to reduce your capital disability cover as your retirement funding shortfall decreases.
As you reach retirement, ensure that you prepare accurate liquidity calculations before cancelling any remaining life cover that you have in place as such cover can play a vital role in ensuring liquidity in your estate, especially where the bulk of your assets are held in retirement funds or illiquid assets such as property.
Putting long-term insurance cover in place means committing to regular reviews as and when your personal circumstances change and as you transition through various life stages. Failing to do so can result in under-insurance, over-insurance or incorrectly structured policies that fail to achieve your objectives when tragedy strikes.