Despite regular media coverage and (also very) active advertising around risk issues, many investors are unsure about why this is important or how it fits with a financial plan.
These are the factors to consider.
1. Why is risk cover considered as an important component of an overall financial plan?
Although life cover to provide for the financial needs of dependants is the main feature of long-term risk cover, it is by no means the only consideration. It needs to be included in a financial plan for other eventualities, including:
- Estate duty. This tax can be a significant amount depending on the value of an estate. Securing insurance for this will ensure the heirs of an estate do not need to cover this from the estate’s assets.
- Capital gains tax. This is another fact of life that needs to be borne in mind in any financial plan, but especially for estate-planning requirements for which risk cover may be suitable.
- Personal and contingent liability. The ideal is for people to reduce debt as quickly as possible but life’s surprises, like the unexpected death of a breadwinner, can leave a family or heirs with serious financial problems if no provision is made.
- Income protection. Risk cover should not only focus on dependents or heirs; any individual may experience a severe illness and temporary or permanent inability that changes his/her financial situation completely.
2. Is life cover required by all individuals?
A financially-independent or wealthy single person with no dependants or heirs may be the one circumstance where it may not be a priority. For all other people it is most likely a critical part of an overall financial plan.
In addition to the reasons stated earlier, business owners or entrepreneurs should also consider risk cover. To provide for share buy-outs in case of the death of a business partner. This is a typical inclusion in most buy and sell agreements. All businesses should consider Key-man assurance to ensure contingency within the company (in other words an employee whose absence through death or disability will have a material effect on the future of the business).
3. As medical care advances all the time, why is dread disease and disability cover recommendable?
Even if a condition can be treated in a medical way, the risk cover might still be needed to help with adjustment to life changes (such as making a house or business premises wheelchair-friendly). This type of insurance is not designed to replace medical aids (in order to pay hospital bills), but to adjust to new living conditions or provide for costs not covered by a medical aid.
4. What are the tax implications of a life policy pay-out?
Payment from a life policy is tax free if paid directly to the nominated beneficiary. If there is no beneficiary it will pay to the deceased estate and if that estate is above R3.5 million there will be estate duty tax of 20%. If the estate is above R30 million the duty will be 25%.
5. In short-term insurance insurers often warn against ‘under-insurance’ or even ‘over insurance’. Is there such a thing in life cover? How is the appropriate cover determined?
Yes over insurance is possible, but if a financial needs analysis is done on a regular basis this can be avoided. Especially when life-changing events such as marriage, the birth of a child, buying a house, etc. occurs, existing cover must be reviewed to establish whether it is sufficient or not. Under-insurance actually happens more often.
Information compiled in partnership with Leslie Greyling of Brenthurst Wealth Gauteng region