No one wants to spend even a mere millisecond thinking about death, or the possibility of contracting a fatal illness or dread disease such as cancer. And how could we be blamed for this? If we lingered on these ‘what if’s’ every morning, we would probably stay in bed.
Yet from a financial point of view, it is absolutely critical to devote some time to these (potential) outcomes. This time, however, should be spent constructively, by taking action. And without a doubt, the best way to take action is to consider – very strongly – the importance of risk insurance. If we are brave enough to delve into these unpleasant issues and put the necessary financial protections in place, we can then go about our days peacefully in the knowledge that we have acted responsibly. (And then banish these thoughts for as long as humanly possible!).
To gain some valuable insight into risk insurance, we chatted to Derek Dingwall, Momentum Financial Planner – who shed some much-needed light on the topic.
Q: In broad terms, what is the difference between life, disability, dread disease and income protection?
DD: Life cover pays out to the named beneficiary on the death of the insured life. Disability pays to the insured life in the event of a permanent disability, which has occurred due to an accident or illness – and as a result, the insured life cannot continue his or her occupation (or a similar occupation or is permanently impaired).
Income protection pays a monthly income to the insured life if, due to an accident or illness, he or she cannot perform their duties as disclosed in the original proposal form. There are waiting periods from 7 days to 6 months before payment is made, depending on the wording of the contract.
Dread disease or critical illness pays out a lump sum to the life assured on the diagnosis of a listed critical illness in the policy document.
The percentage of claims range from 10% to 100 %, and the most common are heart disease and cancer.
Q: Why would I need to have some, or all of the above, forms of insurance?
DD: The needs of each individual are different.
For example, life cover is a death benefit, and most individuals leave behind some form of financial liability when they die – such as dependent children, a dependent spouse, outstanding debt, home loans, car loans, etc. Therefore, this type of assurance has been the most basic and popular cover for almost 100 years.
Disability cover is needed to protect your ability to live financially if your ability to work and earn a living stops (in most cases, it is through no fault of yours, such as by a car accident).
As a side note, a shockingly high percentage of car accidents are alcohol related, and, in my opinion there should be a zero alcohol driving law. This would reduce disability claims dramatically.
Everyone should have loss of income cover through his or her company group scheme or privately.
Dread disease or critical illness is one of the most important policies on the market. In addition, early detection of heart or cancer problems is saving lives. The critical illness policy is for life. The odds of one of us contracting an illness in our lifetime are high.
Q: Do you find a resistance/apathy toward risk insurance? In other words, do some people consider it to be a waste of money, and what is behind this attitude in your opinion?
DD: Yes, there has always been resistance to risk cover, until you experience a friend or family member being affected by not having cover. Then the resistance is replaced by common sense – no one wants it to happen to him or her – yet death, disability and illness are part of life.
Q: Would it not be better for me to use the money on providing for my retirement (take out a retirement annuity, for example) rather than spend it on risk insurance?
DD: If you never use risk cover, the money you spend is the cost of protection. There are some money back policies on the market, but they usually come at a cost.
You cannot replace risk cover with a retirement annuity, as it does not offer any protection. What you can do is use the tax saving to help with the cost of the risk cover.
We now have a longevity product that pays lump sums every 5 years after a 100% claim for life.
As there is no government protection for widows, we need to protect our spouses financially. When the first partner dies, life cover premiums can be paid from the income that retirement annuities offer.
Q: How would one assess one’s needs for the cover?
DD: A financial needs analysis by a financial planner will highlight your needs. There is no one-size-fits all plan – we are all different.
The cost of risk cover is determined by many factors: marital status, occupation, income, and education. Interestingly, the biggest factor is smoking: smoking or not smoking affects 40% of the premium!
An accredited financial planner will guide you through the process of explaining the importance of getting your personal information right from the beginning, and choosing the correct plan for you.