How to best structure your life cover

This is a story of almost anyone who has successfully structured their finances to take account of the unexpected using assurance products to ensure they and their dependants are financially secure.

Mr Well Assured (whom we will refer to as Mr WA) was a 37-year-old professional who was married with three children, aged nine, 14 and 17. Mr WA and his spouse were involved in a motor vehicle accident eight months ago in which he was severely injured and his wife was killed instantly. Mr WA died as a consequence of his injuries last week. He was the sole breadwinner.

Three years ago, Mr WA contracted cancer, which was treatable, but he was off work for eight months as he underwent the fairly harsh treatment. His employer paid him his annual accumulated leave for 30 days and he received another 30 days’ sick leave. Thereafter he was granted unpaid leave.

Fortunately, when Mr WA married he took out individual risk life assurance over and above the group life assurance attached to his occupational retirement fund. He updated his cover as each child was born.

On each occasion he extended his cover, he found he could not afford all the cover he and his family needed. So his financial adviser prepared quotes based on a best-case scenario, providing a solution based on his continuing to live into retirement; and a more affordable compromise scenario, where benefits were reduced according to what he could afford. In the tables (right), constructed by BrightRock Assurance, we list the cover he had before he contracted cancer on both a best and compromise scenario.

In calculating the compromise assurance solution, Mr WA’s financial adviser, who is a Certified Financial Planner (CFP) accredited by the Financial Planning Institute, took account of Mr WA’s after-tax income of R500 000 a year (R41 666 a month); the monthly family budget and its maintenance if Mr WA was no longer able to provide; the family’s assets and liabilities; Mr WA’s group life assurance benefits (occupational defined contribution retirement fund) of three times annual salary (which at death is added to his accumulated retirement savings) and disability benefits; his medical scheme, which was essentially a hospital plan to cover major events; and the total future requirements of the family not covered by accumulated assets and group life assurance benefits, including education requirements and the maintenance of their standard of living.

BrightRock’s best-case scenario provides the protection shown in Table 1 (see “Assurance tables” link). This solution would cost Mr WA an initial R2 072 a month on a sustainable premium funding pattern with the premium increases structured so that they remained affordable as he aged. Putting this option in place would ensure that he and his family were fully covered in the event of injury or illness and death (ignoring any existing group benefits or pension provision).

BrightRock’s middle-road affordability scenario is based on Mr WA only being able to afford an initial premium of R1 200 a month on his life assurance. See Table 2.

The resulting solution would provide less cover, but nevertheless allow him to understand his gaps and plan for them. For example, opting for only R500 000 to cover funeral expenses, estate duty costs and transfer fees simply means that careful planning is required in the event of death – for example, utilising the estate duty exemption.

Mr WA would, in this case, have to consider how he would cover his shortfall on temporary events (including careful consideration of any compulsory group benefits).

Let us assume Mr WA contracts stage-four cancer. He would immediately qualify for the permanent injury or illness benefits applicable at that time, which in the case of recurring needs can convert to a recurring benefit. His R1-million debt would be settled and his cover and premiums (including cover for death) for that need would cease. In addition, his premiums for the temporary and permanent injury or illness events would cease.

What is important is that the additional expenses benefit for stage-four cancer will offer Mr WA the choice of receiving R400 000 upfront plus R13 000 a month for up to 18 months with the ability to continue should his condition persist – the total cover available for that claim event is R800 000.

When Mr WA died, his family would have received all the benefits listed in the death column of the benefit (in this case, cover was provided until the later of Mrs WA dying or the youngest child reaching age 21). Depending on his retirement provision, his risk life assurance could have been reviewed to cover his family only until Mr WA reached retirement at age 65.

When making the decision on the level of cover to purchase, it is important to consider current insurance/saving provisions and also the total cover received for a possible scenario like cancer followed by death, for different cover levels.

For example, a comparison of the total cover received (utilising the above cover amounts) for the above mentioned scenarios are shown in Table 3.

The limitations of group cover

Many people who are employed are members of occupational retirement funds, and if you are a member of an occupational retirement fund you will probably have group risk life assurance as part of the package.

Group life assurance normally provides a benefit if you die and if you are disabled and unable to work.

Schalk Malan, executive director: product at BrightRock, says in deciding how much life assurance you need you must take account of:

* The savings you have accumulated in your retirement fund if you are a member of a defined contribution fund. The more you have saved the less risk life assurance you are likely to need.

* The benefit that will be paid if you die before retirement from a defined contribution fund.

* The amount of assurance cover that the fund provides.

Malan says while group life assurance is important it comes with dangers that must be taken into account when assessing your individual life assurance needs. These dangers include:

* The risk benefit is only there while you are a member of the fund. When you retire or leave your employer for whatever reason you will lose the benefit. At that stage your health may have worsened and you may not be able to get individual assurance or it will come with higher premiums and/or exclusions, meaning the benefit will not be paid if you die from a condition from which you already suffer.

In some cases the product provider may allow you to convert to an individual policy, but the premium is likely to be higher and the assurer will probably require a health check to see if it wants you on its books.

* Most retirement funds offer a fixed level of benefit based on your annual pensionable income. Normally this amount is between two and three times your annual salary. Malan says you will probably need more life cover when you are younger and have a family depending on your income, but when your children leave home you may require less. Increasingly, retirement funds are introducing more flexible options, where you can select what percentage of your “retirement” contributions go to group life assurance and how much goes to retirement savings; or the multiple of salary starts at a higher level (for example eight times) and reduces as you get older to one times pensionable salary shortly before you retire.

* A fixed level of group life assurance benefit as a percentage of pensionable income is particularly dangerous with a defined contribution fund, as your dependants will receive the benefit plus whatever you have saved for retirement. If you are young, the amount saved will be low, meaning you need additional life assurance.

* Disability assurance comes in a number of different packages that will pay benefits when certain conditions are met. The main choices are:

- A benefit is paid when you are unable to do your job.

- A benefit is paid when you are unable to do your job or a similar job.

- A benefit is only paid when you are not able to do any job. So you could be a well-paid electrician but expected to do a lower paying job such as a telephone operator if you lose your sight.

Group life disability will not |replace your income even if you are |on the option of not being able to do your job. It will probably pay a benefit that could be as low as 60 percent of your income and will not keep up |with inflation.

Malan says you need to know what your fund provides in group life assurance and make sure that you |can meet the difference with individual risk assurance.

Assurance structures