Do yourself and your family a favour and check your risk cover

COVER CALCULATION GUIDE

o yourself and your family a favour today (not tomorrow – today) and check whether you have sufficient risk life assurance. In all likelihood, you do not, particularly if you are younger and are a middle- to upper-income earner.

This year, it is expected that 166 729 (456 a day) South African income earners will die and that 55 000 (151 a day) will be permanently disabled.

Most South Africans die before they reach the age of 50 – that’s quite a scary statistic. The main reason is Aids and related diseases. Road accidents, violent crime and diseases claim an inordinate number of lives and leave many people permanently disabled and unable to earn a living.

It is imperative that you buy risk life assurance if you have dependants and do not have sufficient savings to provide for them if you become disabled or die prematurely. Life assurance that pays a benefit on death will ensure that your dependants can maintain their standard of living. And it is even more important to have assurance against becoming disabled as a result of a serious illness or accident.

It is a sad fact that most breadwinners’ dependants will not be able to maintain their standard of living after death or disability, because very few will have taken out any, or sufficient, cover.

Our front-page report is about research undertaken by True South Actuaries and Consultants on behalf of financial services industry organisation, the Association for Savings & Investment SA (Asisa). The research shows just how serious the situation is.

Most families will be forced to cut their monthly spending by about a third on the death or disability of a breadwinner, Asisa deputy chief executive Peter Dempsey says.

I suspect that some people will dismiss this research as a tactic by the life assurance industry to scare you into buying unnecessary life assurance. If you are one these gainsayers, do yourself a favour before you turn to the sports pages of today’s newspaper and do a rough check on how much life assurance you need ( see “Cover calculation guide”, above right).

DAnd if you take the research seriously, as you should, when did you last assess how much risk life assurance you need, or whether the cover you have actually meets your needs?

The importance of risk life cover is underscored by asking yourself two simple questions:

◆ What will happen to me (and my dependants) if I am sick and/ or disabled and can no longer earn a living?

◆ What will happen to my dependants if I die?

At different stages of your life, you will need different risk assurance products and different benefits. You constantly need to revise what and how much assurance you require, particularly when your circumstances change – such as on marriage, the birth of a child, a death, divorce, retirement or even a pay increase.

If you do not revise your risk assurance regularly, it is highly likely that your cover will be outmoded and incorrectly priced and will not meet your needs.

Risk life assurance has changed significantly over the past 50 years – and it is still changing – but not every change may be in your best interests.

Risk life assurance is not simply a matter of buying cover of, say, R1 million that will be paid to your dependants if you die prematurely, or a similar amount if you are disabled. It includes cover if you are severely injured in an accident and are unable to work for, say, 18 months, and if you contract a dread disease.

To get the best value for your money, you need to keep a constant watch on two main issues:

◆ Cost. There is lively competition between life companies, but be warned: cheap is not necessarily in your best interests.

Last year, Personal Finance published research undertaken by True South on behalf of life company BrightRock that showed that choosing the policy with the cheapest premium when you are young can be dangerous for your long-term financial security. The reason is that the cover is likely to become unaffordable as you get older, because the premiums will escalate faster than the rate of inflation.

◆ Changing needs. Risk life assurance should be based on your circumstances at a particular stage of your life. For example, when you are young and have dependants, you need cover Here is a guide to how to do a very rough assessment of how much risk life assurance you should have: Total current household income Less: Income of spouse Pension (in the event of death only) Total annual income required Minimum amount is 15 x annual income required Subtract: Savings and investments R Retirement fund lump sums R Other life assurance benefits (individual and group life) R Sub total: R Add: Debt Special goals (for example, university education) Amount that must be covered by life assurance mainly to support your family if something should happen to you. When you are older and richer, you may need life assurance to cover estate duty and capital gains tax when you die.

It is not a matter of assessing your needs once and then increasing the cover in line with inflation. Depending on your needs, you may have too little life assurance when you are younger and too much when you are older.

The “Cover calculation guide” will provide you with only a very

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Rrough idea of how much risk cover you need, and it is aimed at giving you a wake-up call if you are under-assured.

The best way to assess your assurance needs accurately is to have a financial adviser undertake a financial needs analysis.

A proper assessment of your assurance needs will take a wide range of factors into account, from your age and the state of your health, to the tax implications and the benefits paid by your retirement fund.