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Know the risks involved when getting life insurance

‘Our advice is to protect your income while you’re alive by purchasing income protection, if you can. Leave your spouse after-death income benefits’: Leza Wells, chief product actuary, FMI.

NOMPU SIZELA: In our Personal Finance segment today, we discuss the importance of having an idea about your real risks when embarking on taking life-insurance cover. There’s an assertion being made by some insurance specialists that many consumers often do life insurance in the wrong way, citing that they’re not fully understanding the risks that they may face.

Well, to help us understand where they’re coming from I’m joined on the line by Leza Wells. She’s chief product actuary at FMI, which is a division of Bidvest Life. Thank you so much for joining us, Leza. So, from your actuarial studies, what are the major risks that people face in life?

LEZA WELLS: Hi, thanks for having me on the show. When we talk about ‘life-insurance risks’ we are really talking about major sorts of events that could happen, such as an injury or an illness or an accident that could either prevent you from working temporarily or permanently, [should you] suffer a critical illness or potentially death. So I guess that’s within the life insurance space.

NOMPU SIZIBA: So how is risk actually calculated?

LEZA WELLS: Oh, it’s quite complicated. I guess what we as actuaries would actually do, we would look at statistics around how many people are prone to having an event, and have a look at whether that event is insurable, so across a population of people how many are likely to have that event. And then we could potentially insure that by putting a price on what a group of people would then pay out if something happened on the back of that unfortunate event.

NOMPU SIZELA: So your position is that many consumers get the approach to life cover all wrong. What’s the better way for them to be proceeding, what do they need to be thinking about?

LEZA WELLS: I guess, firstly, we found out that South Africans may take up the wrong type of cover or they’re not necessarily purchasing the right type of cover. We have a huge insurance gap in the South African market. I’m sure the majority of your listeners, when they think about life insurance, are thinking of death cover or funeral cover. Maybe some have insurance and are protecting against some critical illnesses – cancer or heart attacks – but there’s a much lower level of understanding when it comes to protecting your income, and income-protection and disability cover.

We found that most people or advisers themselves also focus on ensuring or safeguarding your family after your death. That potentially leaves people exposed in case something happens and you do not pass away, and something happens to your income and your ability to continue to earn that income. And that’s where we find people are potentially more exposed during their lifetimes.

NOMPU SIZELA: But isn’t part of the problem that you have numerous risks and all these risks have to be priced? If I, as a consumer, decide that I want to ensure that I’m insured for every possible eventuality, surely that’s going to cost me an arm and a leg?

LEZA WELLS: Sure. I think that’s where seeking financial advice is so important, because each person’s circumstance is quite unique in tailoring a package that suits your need, also allowing for the fact that your insurance needs do actually change over time. So, while you are are young and you do not have dependents, if you’re purchasing life cover is it not better to maybe be putting that money to protecting your income, which is actually your greatest asset? Then obviously when you get married and you have children, you could add life cover on.

But still, I think what a lot of people learnt or experienced during the Covid year was that even a month or two of not being able to work and earn an income can be potentially quite devastating to a family.

NOMPU SIZELA: Absolutely. You’ve done some studies. You’re an actuarial scientist and you look at the probability of the different risks happening in people’s lives. And one of the things that you do notice is that injury is something that people are susceptible to in a much higher way than perhaps we’d anticipate.

LEZA WELLS: Yes, exactly.

Our claims experience suggests that even at 25 people often think ‘it’s not going to happen to me,’ but you actually have a 96% chance at some point during your working career to have a temporary injury or an illness that could put you off work for a few weeks, even.

And while we might say that that might not be a long period of time, as I mentioned it can be quite devastating if you don’t have a month or two’s worth of income.

And even at the age of, say, 50, obviously the risk of a critical illness or death is a lot higher as you get older. But we’re talking about your having a 20, 30% chance there, whereas you’ve still got an 89% chance of sustaining an injury and illness that could keep you out of work and not getting that income. So I guess we are trying to get consumers to understand that risk, in addition to life cover.

And another important aspect that I didn’t mention earlier was that, even with life cover, we’re trying to change the way consumers think about it, because you could take out a big lump-sum life cover to leave for your family to look after them. But wouldn’t it be more appropriate to leave an income, the same income you were earning before, for your family – as if your earnings had continued after your death?

NOMPU SIZELA: You’re absolutely right. That would be very handy. So, from the FMI perspective, just give us a product solution that you offer in that regard. If someone were to die, having gone for the income solution, how many years after their death would that solution be available to a family?

LEZA WELLS: Sure. We’ve got various solutions. We call it our life-income benefit that, if you pass away, you can leave your spouse, say, R50 000 a month or R25 000 a month; you can leave each child R5 000 or R10 000 a month until they are 21 or 24. But that could potentially be until you would have retired, because then your retirement might take over or it could be for their rest of their lives. What we actually find is that protects your needs better because, if somebody’s got a big lump sum, they would have to invest that, they would have to make sure they don’t spend all of it, or it doesn’t run out; you’ve got investment risks, inflation risks. So it actually is cheaper to purchase an income benefit because the closer you get to retirement, the older you get, the less cover you need.

What we find is that people who are in their fifties and sixties are actually over-insured, because they purchase these big lump-sum covers, which were appropriate maybe when they were 20 or 30, but they don’t need that cover any more because their children have grown up.

They don’t have the same dependants. So you’re actually paying more for life insurance by purchasing it that way – and you could match your needs a lot better by taking an income benefit.

NOMPU SIZELA: Just very quickly, Leza, in terms of your advice if you were to do the income thing, when would you try and get the income-related insurance, and then the lump sum? I mean, when is it best to get either of those?

LEZA WELLS: Our philosophy is that financial advisors are really the best to give that financial advice, depending on each one’s unique circumstances. Our advice is to protect your income while you’re alive by purchasing income protection, if you can. Leave your spouse after-death income benefits, and maybe lump-sum benefits are more appropriate for death cover to pay off your mortgage or one-off estate costs and things like that.

I would obviously recommend that everyone takes out cover as soon as they can, or that you take out what you can afford. It’s quite a difficult time at the moment. So don’t cancel your cover, maybe just reduce it if affordability is a problem. But, as I say, a financial advisor is best placed to give the best advice.

NOMPU SIZELA: Indeed. Leza, thank you very much for those tips. I’m sure many of the listeners have taken those. That was Leza Wells, chief product actuary at FMI.

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