Life Insurance - An Overview

Life Insurance – what does it cover?

The general perception is that life insurance or “life cover” pays an amount should you pass away; however, it is a term used for a number of benefits which are paid should you be effected by a particular event.

The life insurance benefits that are paid should you pass way are referred to as mortality benefits, and they are many different products availalbe to address specific situations.

Life insurance also covers a number of events where you do not pass away but the event leaves you at a financial disadvantage. These benefits include disability insurance, critical illness or dread disease and income protection.

As life insurance seeks to address the financial impacts of various life events, it is not restricted to you own life only. Should you stand to be financially impacted by an event happening to another person you are able to take out insurance on that person. This requires their consent as well as you being able to demonstrate that an “insurable interest” exists.

Life insurance is accepted as being the most economical and effective solution to addressing the financial impacts caused by the events that it covers.

When taking out a life insurance product it is important to understand the specific objective that you are trying to address. This is important as life insurance addresses a person’s financial well-being and a failure to properly understand the requirement could result in financial hardship. This lack of a clear understanding could also result in over-insurance for some events and underinsurance with regard to others.

One life insurance benefit will not address all of your requirements which it is why it necessary to undertake a comprehensive financial planning exercise.

When a life policy is taken out the financial institution will conduct an underwriting process on the life that is being insured to determine the premium. It is apparent that the younger, and assumed healthier, the life insured is, the lower the premium will be. It is for this reason that the earlier a person addressed their life insurance needs the more affordable it will be and the more cover they will be able to buy.

Momentum’s life insurance product is called “Myriad”. The objective of some of the benefits offered by Myriad are outlined below, grouped into:

Mortality benefits
Disability benefits
Critical illness (or dread disease) benefits and
Income protection.

Mortality benefits

This is generally the most common for of life cover and as noted above the benefit is paid when the “life insured” passes away.

Mortality benefits can be structured as a lump sum or recurring payment and address the following types of broad categories of needs:

Support of financial dependents
Settlement of debts and obligations
Payment of death related expenses

Support of dependents

Typically, the lump sum by a Death Benefit is invested so that the income generated each month will replace the financial assistance that was provided by the life insured. Unfortunately, there are too many instances where the death of a person has left their family or dependents financially destitute, which could have been avoided with a bit of planning.

When a person dies their bank accounts are frozen, often for quite a few months until their estate is wound up. This situation can cause financial hardship as, depending on how families have organised their finances, they could have no or restricted access to cash. Momentum’s Death Income Benefit pays a monthly amount for up to 24 months to address this situation.

As education has become expensive but a crucial requirement, there are educational life policies which are specifically focused on addressing this issue. The Education Protector pays an annual amount until the nominated beneficiary reaches a certain age.

The underwriting process was mentioned previously and some “lives insured” may not qualify to be underwritten for the standard products. In these instances, Momentum offers the Modified Death Benefit which is limited to R5 million.

Settlement of debts and obligations

Among the many consequences of passing away is that all of the deceased’s debts and other financial obligations typically become payable immediately.

By having a Death Benefit that pays a lump sum that is used to settle these debts will avoid the consequences of assets being repossessed.

Payment of death related expenses

The common expression that dying is expensive is very true. The event is unplanned and can put tremendous financial strain on the remaining family members.

The immediate expenses that need to be incurred are the funeral parlour, coffin and funeral expenses which, depending on your religion or culture, could be significant. While Funeral policies that pay a lump sum are typically used to address these expenses the Death Benefit. Estate Plan and the Estate Provider benefits also pay a lump sum within 24 hours a to avoid family hardship.

When a person passes away their “deceased estate” is created which is required to be wound up according to the relevant legislation. This process will also incur costs related to executor’s fees, estate duty, taxes – capital gains tax and others. If there is insufficient readily available cash in the estate the executor will sell of the deceased assets often rendering their wishes as set out in their will meaningless. The Death Benefit. Estate Plan and the Estate Provider Benefit all provide a simple solution.

Disability benefits

Disability benefits form part of the Momentum’s Myriad suite of benefits and are applicable where a person is disabled in some way which effects their ability to earn an income.

The lump sum provided a disability benefit is invested to generate an income that is able to replace the income no-longer being received. Disability generally refers to a permanent disability, and it may take some time before a person’s level of permanent disability may be established.

Momentum has a range of lump sum disability benefits to suite an insured life’s particular circumstances. The appropriate benefit will depend on the definitions which will determine the payout e.g. a person may no longer be able to perform their particular (own) occupation or their inability to perform a similar occupation etc.

While we all like to believe that we are immune to things happening to us, as you survive these events and will probably live for many more years, by not making provision for these possibilities could result in placing enormous financial strain on your family and dependents.

The amount required will be a lump sum that is able to generate an income (through interest, dividends etc) that is equivalent to the income no longer received for a period until you retire (as it is assumed that the monthly amount will include a contribution to your retirement funding which will then substitute the monthly income once you retirement age is reached).

Critical Illness

Critical illness benefits cover what are known as the “big 4” illnesses, cancer, stroke, heart attack and coronary artery bypass, as well as a number of other related conditions. Owing to various factors, the incidence of these illnesses is on the rise, and people are being affected by them at an ever-younger age.

While your medical aid should cover most of the hospital costs, critical illness benefits pay a tax-free lump sum which may be used for

– Supplementing your medical aid for costs not covered

– Paying for ongoing medical costs that may not be fully covered

– Paying to be able to access the best medical expertise and technology.

– Paying for additional expenses or reduced income because of lifestyle changes.

The pay-outs are typically tiered according to severity levels. To establish an element of uniformity in the marketplace regarding the severity levels of the most common critical illnesses (the big 4), the Association of Savings and Investments of South Africa (ASISA) have issued a set of standard definitions, referred to as the Standard Critical Illness Definitions Project (SCIDEP).

Critical illness claims submitted are evaluated against these SCIDEP definitions and grid pay-out guidelines. The pay-out grid typically defines a 25%, 50%, 75% or 100% pay-out depending on the severity.

Owing to the increase in these illnesses, critical illness cover is receiving a lot of attention. Medical advances now allow people to live for long period after being affected by a critical illness; however, this has increased the financial consequences. The lifetime cost of living with Alzheimer’s is estimated to be R3 – R7 million, Herceptin, a treatment used for breast cancer (not usually covered by medical aid) is R25 000 per dose or R550 000 per year, living with colon cancer is estimated to be R1.5 million etc.

While there is no specific formula to use when trying to calculate the amount of cover you need, it is apparent to should be as much as you can afford. Many people have had to revert to prematurely using their retirement savings to address their critical illness costs which obviously then causes a longer-term problem.

Income Protection

While disability insurance typically pays a lump sum, income protection pays a monthly amount.

Income protection can provide for

Temporary income protection – In the instance when the event is such that you should recover within defined period, usually not longer than 24 months and

Permanent income protection. – In the instance where the disability is permanent.

The prospect of having to forgo an income for a period often has a huge impact which is where income protection can assist. It is particularly relevant should you not be permanently employed e.g. a contractor, agent etc. or have your own business as the benefits can also extend to covering the overheads of your business for a period.

These policies usually have an initial waiting period you select from 7 days to 24 months which will influence the premium charged. The waiting period on the permanent income protection policies are understandably longer than the temporary income protection policies.

The amount paid out in terms of an income protection policy can be based on several factors e.g. income after tax income, gross income etc; however, by combining different products such as temporary and permanent income protection as well as a lump sum disability product, it is often possible to achieve a situation where the financial consequences can be largely, if not totally, mitigated.

Conclusion

Life insurance involves a comprehensive set of solutions to protect you from financial adversity but as everyone’s circumstances are different it is important to establish what your exposures and priorities are.

As your life may be impacted in many unexpected ways where you have no control, the various life insurance products are the most effective way of ensuring that you are able to deal with these events. As mentioned previously, it is apparent that you will need multiple products to address your needs. As your circumstances are constantly changing these needs should be reviewed on a fairly regular basis to confirm that they are appropriate.