Risk cover to match your needs
Lifestage investing, where the risk profile of your investments is reduced as you age, has been around for some years. Now a new life assurance company, BrightRock, is offering risk life assurance products that take account of your needs at different stages of your life.
Lifestage risk life assurance is based on your personal circumstances and risk assurance needs rather than simply on your age.
For the most part, risk life assurance has been based on buying cover against the probability of dying, being disabled or contracting a dread or terminal disease, with various bells and whistles attached.
The cover is for “whole of life” – that is, you are covered until the day you die. Often, the amount of cover is then increased to take account of inflation. This system does not take account of your actual needs. At best, you will buy separate assurance to cover things such as the outstanding debt on your home loan.
BrightRock, which is part of the Lombard Insurance Group, describes its approach as needs-matched life assurance, with the cover at any particular stage of your life structured to meet your needs at the appropriate time.
In effect, you buy one policy with many different sub-sections. For example, when you are young and have children, a sub-section will provide for their education in case you die prematurely or become disabled. Then, once your children have left home, the education sub-section closes down and another one, such as your need to cover estate duty and capital gains tax on death, could increase, in line with your increased wealth.
In other words, your risk life assurance changes with your needs as your needs change over time.
BrightRock has grouped risk life assurance into six distinct financial needs: debt, health care, education, household expenses, estate duty and additional illness- and injury-related needs. These groupings are based on how the different needs tend to behave over time.
BrightRock’s needs-matched structure allows you to specify your needs and your claims.
Once your specific needs among the six financial needs have been determined, you can specify the cover you require for each one. You can make specific choices about the term, growth and payout structure of your cover, for assured events and financial needs. For example, for education cover, you can choose to:
* Increase your cover at a faster rate than consumer inflation, while your cover for other needs grows at consumer inflation only;
* End the cover for each child between the ages of 18 and 24, depending on when you expect your children to graduate; and
* In the event of the payment of a benefit following death or permanent illness or injury, have the policy designed so that it pays a lump sum or a monthly amount to meet ongoing education costs.
Your policy can also be designed to pay claims more than once.
Schalk Malan, BrightRock’s executive director: actuarial, says that structuring your life assurance around actual needs makes your assurance more affordable, because you pay only for the cover you need. Existing products are structured around the events that will trigger a payout – namely, the three D’s of death, disability and dread disease – rather than around the financial consequences you face as a result of a claim, Malan says.
With traditional “3-D” products, “there is no visible link to your actual needs and how your needs will change over time. This creates inefficiency, which has an impact on the long-term relevance and affordability of your cover,” he says.
Traditional risk life assurance products are priced in advance over the lifetime of the policy. The result is that, in many instances, you pay now for cover that you will never need. This added expense, coupled with affordability constraints, means that you must often compromise on the level of cover you buy, Malan says.
BrightRock’s focus, by contrast, is on making sure your assurance is relevant and appropriate, both for the event and your underlying financial needs, he says.
BENEFITS OF NEEDS-MATCHED OVER
There are four important benefits to matching your risk life assurance more closely to your needs, Schalk Malan, BrightRock’s executive director: actuarial, says. They are:
* Your cover exactly matches your needs at the inception of the policy and remains relevant throughout the lifetime of the policy, because it is designed to track the expected fluctuations in your financial needs over time.
* You have a better understanding of what your policy covers and how it does this. If, because of affordability or other reasons, you under-assure, you will have a better understanding of these shortfalls and their potential impact.
* You can expect and request a regular review of your risk and policy servicing from your financial adviser to ensure that your policy stays on track to meet your changing needs.
* Your cover is more cost-efficient, because the product structure is designed to bridge shortfalls and remove waste, making it possible to apply your premium more effectively. In this way, funds are freed up that can be deployed elsewhere within your risk portfolio. This also has a positive effect on long-term premium sustainability, because future premiums stay appropriate to the need.