The life insurance industry is inundated with technical jargon and product design complexities which are very often difficult for a layperson to understand. In addition, policy documents are generally lengthy reams of paper and many people avoid reading altogether. When taking life cover, pay attention to the following:
Accelerated versus standalone benefits
It is essential to determine whether the benefits you have in place are accelerated or stand-alone benefits as this can have a significant impact at the claims stage. Accelerated benefits are usually included on a life insurance policy which includes dread disease and/or lump sum disability cover. If your benefits are accelerated, it means that the value of a dread disease or disability claim will effectively reduce your death and disability benefit by the same amount. For instance, if you have life cover and capital disability cover of R1 million, and you claim R200 000 from your dread disease benefit, both your life cover and capital disability cover will reduce to R800 000. On the other hand, standalone benefits do not have the effect of reducing your life cover and can be sold separately or in conjunction with life cover. It goes without saying that standalone benefits are generally more expensive than accelerated benefits as the insurer stands to pay out more in respect of claims.
Some accelerated policies make provision for a reinstatement benefit which effectively makes provision for the death benefit to revert back to the original amount before the dread disease or disability claim was made. However, this is a highly technical area of insurance and it is advisable to seek the guidance of an independent advisor when structuring reinstatement cover.
Waiting periods are effectively an underwriting mechanism used by insurers to ensure that clients do not anti-select against the fund. A waiting period means that, although your policy has commenced, you are not yet able to claim against the cover until a pre-determined period of time has elapsed. For instance, if you have a three-month waiting period on your income protection benefit, you will only be able to claim for lost income after three months has elapsed, and this can leave you in a financially precarious position. It is therefore important to determine what, if any, waiting periods you have in place as this will affect your financial planning and your emergency funding requirements.
An insurer can choose to increase your premium as a result of a particular risk that you bring such as a health condition, your occupation, or any hazardous activities that you engage in. This is referred to as a loading and is effectively an additional premium that you pay for being a higher risk to the insurer.
When applying for your life cover, you have a duty to disclose all or any information that may be considered material to the insurer. The insurer can only underwrite you in accordance with the information that you disclose to them openly and honestly upfront. This includes information such as drug usage, pre-existing medical conditions, alcohol intake, smoking habits, dangerous activities, family medical history, mental disorders, back problems and so on. Bear in mind that an insurer can repudiate a claim if it finds that you did not make full disclosure when applying for cover, even if that disclosure is not material to the claim. If you have any concerns about possible non-disclosure, discuss the matter with your financial advisor and communicate with your insurer.
Check whether your policy includes a retrenchment benefit. While not very common, some policies do include such cover although it is generally quite pricey and normally limited to a six-month period.
If you have group life cover in place through your employer, determine whether it includes a continuation option. A continuation option allows you to convert your group life cover into personal cover when you leave the employ of a company, with the benefit that you won’t need to be medically underwritten – bearing in mind that the rates of cover on a group life policy are typically cheaper than in your personal capacity, and if you exercise the continuation option you will need to pay for the policy at your personal rates of cover.
It is important to check the beneficiaries that you have nominated on your life policy as this will determine how the proceeds will be paid out if you die. Marriage, divorce, or the birth or death of a child can all necessitate that you review your beneficiaries. Give careful thought to the implications of naming a minor child as a beneficiary on your life policy as, in the absence of a testamentary trust, the proceeds will be administered by the child’s legal guardian.
Future cover benefits
Some insurance policies give the insured the option to buy additional cover with no, or limited, medical underwriting which, in turn, can result in a significant premium saving over time. It can also have the added advantage of protecting the policyholder against future uninsurability.
Premium waiver benefits
Assess whether your policy includes a premium waiver benefit. A premium waiver is designed to continue paying the policy premiums on behalf of the insured on the occurrence of a specific event such as death, disability or dread disease. This benefit can be particularly useful in financially stressful times, so check whether your policy includes this offering. Generally speaking, the premium waiver on death continues for the term of the policy, while a premium waiver on disability, impairment or dread disease continues until age 65 or some other pre-determined age.
Be sure that your death benefit includes all causes of death and is not limited, for instance, to accidental death only. Various forms of death cover exist such as unnatural death benefits, last survivor death benefits and first-to-die death cover, so be sure to know exactly what you are insured for.
Term of the policy
Be sure to check the term of your policy. Death benefits can be purchased for a fixed term, such as 10 or 20 years, or for the whole of life. Similarly, some benefits, such as dread disease and disability cover, cease at a pre-determined age such as age 60 or 65. Once your cover ceases, you will need to ensure that you are adequately provided for in terms of your overall financial planning.
Dread diseases covered
It is important to note that dread disease cover does not cover all possible illnesses, but rather a limited number of conditions will be covered – something which varies from insurer to insurer. The most common diseases covered include heart attacks, strokes, cancer, and coronary artery bypass graft surgery. While some insurers differentiate their offering by including over 300 illnesses or conditions, others use more intricate methods of calculating disease severity at claims stage.
Although the purpose of this benefit is to provide a monthly income if you are disabled, it is essential to know whether your policy covers you for ‘own occupation’ or ‘own or reasonable other occupation’ disability as this will have a financial impact at claims stage. Further, be sure to check whether your benefits are level or increasing. Ideally, you want to ensure that your benefits increase in line with inflation. It is also important to determine whether your policy covers you for both temporary and permanent disability.
Check what exclusions are included on your policy. Most policies include general exclusions such as war, terrorist activity, riots, alcohol, poison, drugs, attempted suicide, self-inflicted injuries, nuclear explosions, and so on. However, your insurer may also have included exclusions specific to you such as a mental order or back exclusion.
Some insurers include what is referred to as a survival period on their policies. For instance, before paying out a dread disease claim, the terms of the policy could insist that the policyholder survives for a minimum period of time, usually 14 or 28 days, after the medical event before paying out – so be sure to find out whether your policy includes such a stipulation.
It is critical to understand how the premiums on your policy will change and increase over time, as this will affect your future affordability. Most insurance policies offer level premiums, compulsory premium increase, and age-rated premium patterns, so be sure to find out exactly how your premiums will be adjusted over time.