Inflation is the enemy of all investors – particularly when it comes to life insurance. If you do not review your cover regularly and die prematurely, the effects on your family could be disastrous. At an 8% inflation rate, the purchasing power of money will be halved and therefore your current life cover will be half the value in nine years.
50 years of development
The first life insurance policies were non-profit, had no surrender value, and the only benefit was to your family in the event of your death. The next to be developed were policies which included some bonuses. These policies built up pockets of cash which could be used as loans – and many policyholders cashed in their policies if they had not died by, say, the age of 70.
During the 1980s, when inflation reared its head, life policies included inflation escalators, whereby cover increased on an annual basis but never by the same rate as the escalator. For example, a 10% increase would only provide a 6% increase in life cover with the balance going towards building cash values in the policy. With further innovation, the industry has gone full circle and consumers are now purchasing straight life policies to provide a payment on death without including any fancy frills to try and build up an investment account. The costs, including commission – and the inability of insurance companies to provide good investment returns – have resulted in this change.
It is always difficult to calculate exactly how much life cover is needed to ensure that families are able to maintain themselves in the event of the death of the main breadwinner. If you are using life insurance purely to cover a debt, the calculations are reasonably simple. However, when providing for a family’s future – education, inflation, home renovations and the purchase of cars, all need to be taken into account. It is at these times that you must remember that an amount insured for today – and the resultant investment income from these funds – may only provide for a lesser time period than the family’s actual requirements.
When calculating how much life cover you require, include the life cover you may already have as a member of your company’s provident or pension fund. Although this could be taxable on your death (depending on whether you are a member of an approved or non-approved group life scheme), you will need to add the after tax portion of this cover to your own personal cover.
If you leave your company, this cover falls away, unless you take up the continuation option within 30 days of leaving. This is usually offered free from most medical requirements.
Play it safe
It is always better to be safe than sorry. Rather be over-insured than under-insured. It is necessary to take into account all eventualities and plan your life insurance while you still can. You should always reassess cover in the event of any major life-changing events such as: marriage, the birth of a child, the purchase of a home or taking on bond finance, changing jobs, or divorce.
One of the most important aspects of life assurance is to nominate a beneficiary in the event of death. If the nominated beneficiary is a spouse or dependant(s), then the policy pays out virtually immediately – to the stipulated beneficiaries. If, however, the beneficiary is the estate, then it may take a considerable time for the funds to be paid out to the dependants, as payment first has to be made to the estate. During this time, unless other arrangements have been made, your family may struggle with day-to-day living expenses. Direct insurers now compete with companies who use agents and brokers. It must be noted that rates can vary enormously depending on health, job description and additional benefits such as disability and dreaded disease. Therefore, I believe it is in your own best interests to use a broker, who will search for the best deal in the marketplace.