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Looking at life insurance? Read this first

Published Apr 5, 2022


By Dominique Bowen

According to the Association for Savings and Investment South Africa, more than 1.5 million death claims were received by insurers between April 2020 and September 2021, with an eyebrow-raising R92 billion paid to beneficiaries of these claims. Under the spotlight for insurers, in particular, is the 53% surge in deaths in the last six months of that period; that’s 200 000 more deaths than were claimed during the same period in 2019. As for the value of these claims, this more than doubled, with an increase to R44.4 billion from just under R20 billion in 2019.

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These statistics paint a picture of the severity of Covid-19’s impact on the life insurance industry, but also demonstrate how much of a financial relief life cover can offer beneficiaries of it. Tomorrow isn’t guaranteed, and many of those who were uninsured or under-insured before the pandemic took much-needed steps to get serious about their financial planning to cater for this reality.

The Goldilocks scenario for insurance – the right amount of cover at the right price – is beneficial to both insurer and insured. When this is thrown out of balance, there’s the risk of over- or under-insurance, and there’s no true “winner” in either of these scenarios. So, is your cover as balanced as the rest of your financial plan?

The purpose of life cover

It’s important to be on the right page about your intentions for the policy payout, and there can be several. The traditional narrative is that benefits can be used to cover the living expenses of your dependants, if you have any, on your passing. Even if you don’t have dependants, your estate could have liabilities that would need to be covered, such as debts, estate duty and executor’s fees.

George Kolbe, head of marketing at Momentum Retail Life Insurance, says that you may be compelled to apply for insurance as a condition of a personal loan you’d like to take out, or consider it as a safety net to help with the continuation of a business you own.

Particularly when it comes to cover needed for your surviving dependants, life insurance should be seen as an aid that offers financial continuity in the absence of your income. What that means is placing your dependants in a similar financial position as before your death, says Sonja Linde, a Certified Financial Planner and owner of InSync Financial Services. Bearing this in mind is key. “Insurance is not intended for enriching oneself or your family,” says Linde. “When you have an amount of cover that pays out on death or disability that will significantly enrich the lives of you or your family, that would be seen as overinsurance.”

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Insurers have stringent protocols in place at application stage to prevent applicants from being granted cover that would enrich their lives, or those of family left behind if they were to pass away. Kolbe provides an example of what an application for overinsurance would look like: “If you earn R10 000 a month, and you apply for R20 million life cover to replace your income should you pass away, it is clearly a case of overinsurance, as the R20 million is significantly more than what the income replacement requirement realistically should be.”

No one wins with overinsurance

Even with protocols in place, there are those who will consider trying to swindle the system, but this can only end in tears. First, knowing that there is a payout on the other side of a claim event, some people will go to concerning lengths to get their hands on it. “Overinsurance can lead to unethical and dangerous incentives to claim against cover,” says Linde.

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Then, while insurers do commit to paying the benefit out on valid claims, they are as committed to ensuring a valid contract is in place at the time of a claim. If it’s found that you intentionally applied for cover to enrich your loved ones’ lives, not only may that claim be declined, but you may also garner a mark on your record with that insurer (and perhaps others, too), which would come with its own range of unfortunate consequences.

Let’s also not forget that paying a higher premium for an overinsured amount can take an immediate toll on your finances. “Paying too much on insurance can result in shortfalls on other financial planning goals, such as retirement, children’s education or even just settling some debt,” says Linde.

How to avoid it

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Your first step is to contact a trusted financial adviser, because they will take an objective view of your current financial situation and offer expert holistic advice. Any good adviser will put you, the client, at the centre of the planning process, and not just “try to sell you another policy you don’t need”.

“It is important to have a financial plan done with a professional financial adviser, who can review all these areas for you to make sure that your risk needs are covered adequately, and that you then also address your other areas of financial planning,” says Linde.