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Insurance for each life stage

A needs-based analysis can assist in getting the right cover without under- or over-insurance.

NOMPU SIZIBA: Data indicates that South Africa has a significant insurance gap. Asisa [the Association for Savings and Investment SA] reports having identified a death insurance gap of around R12.9 trillion, and a disability gap of around R16 trillion. Financial practitioners are keen to put the word out that people need to get insured, as it will secure peace of mind. But today’s advice speaks to the cover people should focus on at the various stages of their life.

I caught up with Petrie Marx. He’s a product actuary at Sanlam Personal Finance. Petrie, it’s true that many South Africans don’t get sufficient insurance cover, if any at all. Why do you think that’s the case, and presumably financial constraints are also part of it?

PETRIE MARX: Yes, thank you, Nompu. We often hear insurance is a grudge purchase. That means that people tend to put it off for as long as possible, and they need to be convinced to take it out. We do need to recognise that there are financial constraints, and affordability does play a role in [these] economic times. But I also think financial education does play a role. By that I don’t really mean education about the products that we offer, because there is not really much to a life-insurance product. It’s education about understanding the reasons why you actually need cover. Life insurance is supposed to do a particular job for you, and I think if the market or the public understands what those jobs offer the person, him- or herself, it will become less of a grudge purchase and be easier to prioritise in those financial constructions.

NOMPU SIZIBA: Perhaps in your small way you can try and explain that in your response to this question, which is how a needs-based analysis can assist people in getting the right cover?

PETRIE MARX: Definitely. If you understand the two needs, that’s the first step to getting the cover that is really suited to you. Then you make sure that you have sufficient cover without necessarily under- or over-insuring yourself. For that it’s always advisable to speak to a qualified person, somebody who is a financial intermediary or a specialist to help you with that analysis. And there are also other self-help tools available these days. We call them robo-advice tools, which are more familiar in the investment space, but they are starting to emerge where someone can really play around and get to know and understand the needs that one needs to cover.

NOMPU SIZIBA: Is that you, as a consumer, looking at a list of things and then ticking boxes, and being aided by a robot as opposed to a human?

PETRIE MARX: That is becoming available. It’s important , though, in my opinion, to create that personal connection, to understand and do that on available information, again understanding why you need to think about life insurance. Once you understand that I think the next question will be how much you do need. I think the tools are much more effective in quantifying that. But in terms of making the personal emotional connection of what the jobs are that life insurance should do for you – that is something about which I think as an industry we can do a lot more.

NOMPU SIZIBA: There is a framework of insurance cover that you are proposing for people at different stages in their lives. Let’s start with the various styles in a young person’s life, be they a student or just starting out professionally. What advice would you give them about the kind of framework they need?

PETRIE MARX: A young person, who may not have dependants at that stage, may mistakenly think that they don’t need any life cover. I think from early on in your life, be it in the form of a student loan, you start to incur some debt and you don’t go onto family care and then you inherit that debt, in the unlikely event that something should happen to you.

But, most importantly I think if you start out at work, and start out with your career, you have your whole working life ahead of you. We often say your biggest asset – again, to secure your whole future lifestyle – is your income-earning potential. And young people, even if you are single and starting off with a career, you must understand that income protection is really the most important form of protection at that point.

NOMPU SIZIBA: And the thing is, as well, that you are going to be penalised if you try and get insurance later in life as opposed to getting it earlier in life. Right?

PETRIE MARX: Yes, definitely. I won’t say “penalised”, but you will pay a higher price to get a fair amount of cover at an older age. So even though at that young age you may not need all the cover, it’s always advisable to start putting in place a basic layer of protection to benefit from while you are still very young and healthy, and that benefit will remain with you for as long as you are on the policy.

NOMPU SIZIBA: What sort of cover is preferable when you are settling down, perhaps moving in with a partner or a spouse? And then, when you graduate to have a family, what sort of cover needs to be in place then?

PETRIE MARX: If you start a serious relationship, even before you perhaps get married, I think what we often hear is sometimes you co-sign for some debts – maybe a first mortgage or first assets that your start to put together – if you co-sign for those, both parties need to put in place certain life cover so as not to leave the other one with a debt burden. If you think about it practically, Nompu, most young families these days need both income streams to survive and to lead a good, healthy lifestyle. So I think, again, your income protection remains important, in addition to that debt cover offsetting maybe your first mortgage.

NOMPU SIZIBA: Just to respond to the family aspect, when you have children you’ve a whole other layer of responsibility. So what do people have to ensure that they have in place then?

PETRIE MARX: It’s clear we all want the best for our children, and we do want to make provision for them to have the best possible education to take them through their school years and during tertiary education. It’s a very high priority that will jump straight up onto the radar as soon as you start to have kids.

NOMPU SIZIBA: As people get older, obviously their needs will change and health concerns may be on the radar. So what cover should they ensure that they have in place then?

PETRIE MARX: That’s quite right. When you are perhaps into your middle age, with health risks, you become much more aware of that – maybe the risk of heart disease or cancer, with quite stressful lives. So your severe illness type of cover will start to become important, or start to look very appealing.

And also at that age maybe your needs start to change. Maybe the kids become a bit more independent, so you need less of the income protection, although you still need to protect your income. But you start to think about types of health insurance in the form of severe illness cover.

And also, by that stage you may have built up some assets, so it’s time to start thinking about estate costs to be able to wind up the estate – estate duties, capital gains tax, and so forth. So you will still need some additional life cover as well for that purpose.

NOMPU SIZIBA: And in terms of when you are a pensioner, what sort of insurances do you need as a pensioner, except maybe life insurance?

PETRIE MARX: Again, we sometimes hear that pensions don’t need cover. I disagree with that. There are several reasons why pensioners will still need cover. Maybe a small portion of them still have some debts, so they don’t fall away completely. And those costs I mentioned earlier – the cost of winding up the estate are still there.

I think you also think practically, when you look at your pension, that in our environment it’s often structured so that the pension will reduce should your spouse pass away. So, if you think whether your expenses will really reduce, you will need to have some additional life cover to supplement that. You’ll be thinking about funeral costs and some funeral cover can be effective.

And again, I think a topic today is this issue of long-term care and maybe dementia and all those types of dreaded diseases which in our environment are often best protected against by some severe illness cover, preferably severe illness cover that you have taken out a few years earlier, so it’s not getting too expensive.

Then I think, last but not least, the pensioner or the retired pensioner will want to leave a legacy, want to leave behind something to the family, and I think life insurance again is the perfect way to put that in place and secure that legacy into the future.

There are several reasons why you need cover. There are some golden threads, but also some unique reasons at different life stages as you grow older.

NOMPU SIZIBA: Thanks to Petrie Marx from Sanlam personal finance.

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And insurance will always tell you that you are under-insured after submitting a claim.

Cover for immediate cash needs is crucial – it can take VERY long to wind up even a moderately complex estate, doubly so if you did not have a proper will with executor and the Master has to intervene with a court appointed blood sucker. So a life policy to spouse/kids that immediately pays out at least18 months’ living expense (incl debt payments) zis essential.

Next up that people forget is taxes. It makes sense to have cover for estate duty – something which most people do not deduct off their theoretical death balance sheet.

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