One of the most complex financial products for consumers to understand is life cover. These deals come with reams of fine print and it is hard to tell what your beneficiaries will receive when there is a claim.
Add to this the perception that life assurance companies are reluctant to make pay-outs and that there are many technicalities that stand between your family and a cash payment from the insurance company.
However, the flip side is that life cover is often the safety net that protects dependents from destitution and should be a “must have’ for everyone who wants to ensure their liabilities are covered when they can’t make the payments. In this article, independent financial advisor Dawn Ridler explains how life cover works.
She also outlines where disability and dread disease insurance fit into the picture, including some tips on how to choose cover that is right for your circumstances and won’t let your family down when it needs financial assistance at a stressful time. You can use life cover to preserve and even boost your family’s assets, provided you ask the right questions and make the right choices. – Jackie Cameron
By Dawn Ridler*
Life cover is probably one of major grudge purchases a working age adult will make, and once you start adding other benefits it can become really pricey. Here are some hints and tips so you can make sure you’re getting what you expect, without paying the earth now – or in the future.
‘Life Cover’ insurance is made up of three major components – ‘life’, ‘disability’ and ‘dread disease’ but are all classified as ‘life’ cover because the insurance company has to have a ‘life licence’ to offer them. There are a few ancillary benefits like funeral cover, retrenchment cover etc., but these are all still classified as ‘Life Cover’.
This might sound like semantics but some gap covers have fallen foul of this definition and are having to remove ‘life’ benefits like cancer lump sums.
Actual ‘life cover’ – cover that pays out if you die, need not be for life. If you take it for a defined period (called ‘termed cover’) and not for life you will be able to save money. First prize is if you can increase this without underwriting at a later stage if you still need it.
At the very core, life cover should cover your debts and liabilities plus the cost of getting your children financially independent. If you have agreed to allow your life partner to be financially dependent on you for life, then his/her costs for the rest of their life needs to be factored in too (and you may need cover ‘for life’). If you don’t keep on increasing your debt (smart), life cover should decrease and not increase every year.
Life cover is pretty simple: either you’re dead or you aren’t.
Dread disease cover is slightly more difficult but there are now global standards of severity. Disability is a nightmare – be very careful which provider you choose. (Use an Independent Financial advisor who can get you a variety of quotes from different providers).
It is possible, in fact often preferable, to use different providers for the different ‘life’ benefits so that you get the ‘best of breed’.
Life cover can be bought purely on cost, as long as there are no nasty surprises in the small print (read the general and specific exclusions carefully before signing). When getting comparative quotes ask for projected premium increases on level or age-rated premiums and compare them side by side or graph them.
The differences will shock you. By all means get a quote from a call centre life company – their premiums are usually a good 20% above the lowest premium from one of the big providers (and almost always age-rated). Someone has to pay for all those TV ads – don’t make it you. Always get a comparative quote if you’ve decided to DIY and read all the small print and graphically plot the premium increases.
If you’re lured by the ‘cash back’ promises of some life companies, be aware that this is not free. Get a quote before and after the ‘cash back’ and compare it to investing the money yourself. Remember, if you cancel the cover or have to claim, you lose that benefit – if you’ve invested it, you won’t.
Dread disease cover should NOT be severity based (the most common type), should cover at least 300 diseases and pay out quickly after diagnosis. Severity based means that they pay you out a percentage depending on the severity of the disease, for example at stage one cancer you only get 25% – more will be paid out if it gets worse. Most cancers are picked up at an early stage but it does not decrease the cost you will pay to stop it.
Make the dread disease ‘standalone’, NOT ‘accelerated’. If it is accelerated it will be taken out of your life cover – which you may never be able to increase because of the claim. Even better, choose a product that will allow multiple claims – for example, cancer, then a heart attack or a stroke. Some products will even let you claim again if cancer comes back and is unrelated to the first claim.
Lump sum disability cover should cover all your debt and liabilities and pay out on permanent disability. Not all providers are created equal. This is the benefit where you will find some really dodgy claims criteria.
Ask your broker or advisor what the ‘claims criteria’ are – how are they going to determine if you are ‘disabled’. This is not found in the small print. Look out for blanket clauses that say they will pay when you (a) can’t do your job, (b) can’t do any job (c) including self-employment (begging at the traffic lights in a wheelchair anyone?).
Permanent income disability has the same ‘definitions’ issues as lump sums. With the income product, find out how they treat income you get after being declared disabled. If you pick yourself up, retrain yourself and write a book for example – how will they treat that income?
The income or lump sum you get on permanent disability (which often only pays out at 75% you’re your salary in a corporate scheme) MUST include what you would have saved toward retirement. Even if you have group disability, you may need to top it up with some in your own name.
Temporary disability is one of the areas for the highest claims and is quite expensive. Despite assurances from providers that all that is required is a ‘sick note’ from the doctor, it isn’t. It is a much more strenuous and subjective process that can take months with them requesting reports (at your expense) from specialists etc.
At the very most, it should kick in after one month – most company/group benefits kick in after three which has been very problematic in my experience. This assumes that the employee has full sick and vacation leave available and this is rarely the case.
The premium pattern you use is crucial. This is quite complicated, but basically there are 2 types: level, or age rated. Level premiums increase linearly (a straight line) depending on what increase you want in cover per annum.
Age-rated premiums start out lower than level premiums but increase in an exponential curve every year (a curve bending ever upwards), breaking even with the level premium after about 6-7 years and thereafter the price rises can be very much higher and consume more and more of your income. Often these premiums become unaffordable and the policy is cancelled or downscaled. This is a huge problem for dread disease cover because the older you get, the greater the need, unlike life cover.
Accidental death cover and life cover are not the same, and the former is way cheaper. In my opinion, don’t go anywhere near accidental death cover; apart from anything else it can be difficult to prove.
There are three types of disability cover: Lump sum on permanent disability, income on permanent disability and income on temporary disability. Not all the providers are created equal in this regard and group disability cover specifically usually has the hardest ‘claims criteria’ to prove. I am so disenchanted with group disability cover that frankly I would go as far as to recommend that it be ignored and that you make sure you are also covered in your personal capacity.
Protecting your ability to work until retirement is vital, temporary or permanent disability is the one thing that could prevent that. In my opinion, this is one cover that should not be skimped on.
Action: Buy life cover on cost (paying careful attention to the premium increases and the ‘term’), buy disability cover on claims criteria definitions and dread disease cover that has 100% payout at stage one. These benefits should not be ‘accelerated’ (i.e. come out of your life cover).
You can use different providers for all three to get the best cover possible (in my experience no one provider is the best at all of them at the moment). Ask your broker or advisor for quotes from at least three major providers.