THE IMPORTANCE OF LIFE COVER
With South Africa currently restricted by a Level 4 Lockdown it is topical to consider what risk benefits one definitely needs in place during a pandemic. In this month’s Financial View, we look at the impact of the pandemic on lives and how to calculate how much life cover one should consider.
The Impact of the Pandemic
60 647 South Africans have passed to date due to the Covid pandemic. Each one of us probably knows someone close to us who has either passed or whose condition was very critical as we experience a more contagious and more deadly variant of the virus.
The pandemic has resulted in many Government interventions such as the Level 4 Lockdown restrictions that we are currently under and many other such measures that have at times decimated the economy and affected many livelihoods – “lives over livelihoods” as opposition political parties are quick to point out.
The impact of the lockdowns and restrictions though have had a greater secondary impact on the population. Many more lives have been lost to “non-covid” conditions as demonstrated by the weekly deaths as calculated by the South African Medical Research Council.
The spikes in the weekly deaths as represented by the black line has almost perfectly tracked the various Covid graphs and although it has followed the trend of the pandemic the black line indicates that there were 180 000 excess weekly deaths over the 18 months since the onset of the pandemic – the number calculated as the amount of deaths above the upper prediction bound. Only one third of these deaths have been linked directly to the pandemic. If the deaths attributable to Covid is an accurate measurement then the pandemic has had a direct impact into the health of people suffering from other conditions.
The increase in deaths due to other conditions could be attributed to an increased difficulty in getting access to medication and health care through transport restrictions and closure of government facilities. How many people are not seeking the medical attention that they need because they are concerned of getting sick at the very place where they can get relief from their current conditions?
The increase in the number of deaths has caused many people to reconsider whether they are adequately protected through life cover.
How much Life Cover does one need?
Each individual has unique personal circumstances, so we have tried to not provide a generic one size fits all solution. Rather some of the following points are designed to get you thinking about your own circumstances and if you require specific advice we are happy to assist.
Life cover is one of the most important building blocks in financial planning. The reason for this is that no-one wishes to place financial pressure or a financial burden on the loved ones they have left behind. If you manage to enjoy a full and lengthy life you would typically have enough assets and income to provide for your dependants, but they are at risk if you depart whilst you are still in the stage of growing your asset and income base.
The three most important considerations that impact the value of life cover:
- Your age
- The number and age of your dependents
- Any debt obligations that you may have
Age is a big factor in life cover, especially when it comes to pricing. The older you are the greater risk you have of passing from natural causes. This means that life policies become very expensive as you get older and this is done to protect the insurer against this increased risk. Fortunately, as you get older your need for life cover diminishes as your children may now be earning their own income and no longer financially dependent on you. They would have also hopefully moved out of your home which you could have already paid off and have no mortgage against it.
The number and age of your dependents would be the most important consideration to many. Will your spouse and children have sufficient sources of income to provide for them until such time as they are able to obtain employment or look after themselves? Each one of us is fully aware of how much our dependents can cost, especially when you add in things like school fees, food and clothing. One would need enough life cover to provide for all the expenses that they will still incur in future until they are able to generate their own income.
The final consideration in calculating amount of life cover required is to look at any debt that you may have – with mortgage bonds often being the largest and most common. In the event of your passing you would want your dependents to be able to continue to live in the same house and thus it is prudent to have sufficient life cover to settle any outstanding amounts so that nobody is forced to sell the house in your absence.
Other secondary considerations that one looks at when calculating the quantum of life cover is to look at general estate planning and using life cover to provide the liquidity to settle the various taxes without forcing anyone to sell assets or heirlooms.
Circumstances do change over time and one should continually amend the amount of life cover to match those changes. When you have a young family and have recently purchased a new family home your life cover requirements are large. When it is just you and your spouse in a long paid off home then theory would dictate that you don’t need as much life cover – especially if you have a nice accumulated retirement savings pot. Remember that your retirement savings can also be structured to go to your dependents in the event of your passing.
Life Cover during a Pandemic
It is important to note that life cover is not linked to certain causes. When you buy life cover and you pass as a result of illness the policy has to pay out. The South African insurers have seen a dramatic increase in their payout levels this last year. Every 6 months the Long-Term Insurance statistics are released by ASISA (The Association for Savings and Investment South Africa) and in their last report they indicated that the life industry had received a 37% increase of death claims this past year. In total, claims and benefit payments worth R522.7 billion were paid out by SA life insurers during 2020.
Sanlam recently provided a great graphic that demonstrated the breakdown of claims per age groups and one can see that your risk increases significantly as you enter your 40’s through to your 50’s.
Life cover is often a grudge purchase, but it is a critical purchase to make sure that you provide for your loved ones in your absence. We unfortunately find many instances in real life where the individual is under insured or more concerning is over insured with too much life cover – worth more dead than alive. Our industry sometimes deserves its bad name as we often find in the instances of over insurance it has been at the insistence of a “financial advisor”.
Reducing your life cover to the appropriate amount with a direct reduction in premiums means that there should be more funds to go towards retirement savings as the odds are in your favour that you will reach retirement. Currently 60 647 South Africans have died from Covid. 1.75m South Africans have had Covid and survived. Make sure that you plan adequately for your loved ones and make sure you plan to live comfortably as well.