Buying the right risk assurance product

Every day we expose ourselves to risk. Crossing the street, driving on our roads and even eating unhealthy foods all have an associated risk attached to them. We often do crazy things like skydiving or underwater diving that expose us to even greater levels of risk.

But there are certain risks that all of us simply cannot afford to take. For example, we all need assurance cover against death, disability and severe illness.

The importance of having life assurance is underscored by the following questions:

• What will happen to you (and your dependents) if you become sick or disabled and can no longer work?
• What will happen to your dependents when you die?

A casual read of any newspaper reveals just how often people become disabled or die when they are relatively young.

It is important to note that not being paid a benefit or never claiming does not mean that your premiums have been wasted. It means you have enjoyed many years of peace of mind knowing that both you and your family would not have been left destitute if the unexpected had occurred.

Maintaining living standards

Deciding whether or not to take out life assurance has nothing to do with you betting that you will die at age 100, peacefully in your bed. It is about ensuring that you and your dependents are never put at financial risk should you be hit by the proverbial bus.

Risk assurance comes in many different guises and can be structured in a multitude of different ways.

You will need different types of risk assurance products at different stages of your life. This is why reviewing your life assurance products and policies, especially when your personal circumstances change, is paramount. A marriage, birth, death or divorce are all so-called trigger events that necessitate policy reviews to ensure you remain adequately insured.

When assessing and establishing the correct type of risk assurance product, the guiding principle should be to ensure that you and your dependents can, and will continue to be able to, maintain your current standard of living. Risk assurance is not there to enrich your dependents or beneficiaries.

Separate your risk and investment policies

Generally speaking, you should keep risk and investment policies separate. Here’s why:

• There are no penalties when cancelling a risk assurance policy.
• Your assurance and investment requirements change over time and often move in different directions, which could result in divergent outcomes.
• A risk assurance policy is normally taken out for long periods of time. If you link your investment objectives to the same term as a risk assurance policy, you leave yourself with fewer options if you want to take advantage of new investment products, which may have lower costs and therefore provide better returns.

Risk assurance against death and disability has valuable benefits, including:

• Protection against loss of income – you need to ensure that your dependents are able to maintain their current standard of living
• Protection of savings plans – any existing savings plans would be at risk in the event of unforeseen life-changing occurrences
• Protection against debt – ensuring that your dependents are not left with huge amounts of debt to settle
• Protection of business interests – if you own a business, it will need capital to survive

The main types of personal risk assurance policies available in South Africa are:

• Whole of life assurance – this type of cover is for the whole of life. However, you do not have to retain the policy for your entire life, it can be cancelled at any stage
• Term assurance – this is assurance that covers a predetermined period of time, either short or very long
• Increasing term – the benefits increase at a predetermined rate
• Decreasing term – your benefits decrease at a predetermined rate
• Convertible term – this type of policy allows you to renew the policy at the end of a preselected period
• Credit life assurance – this is essentially term assurance, but the cover is normally linked to a specific debt, such as a home loan or vehicle finance

As you can see there are multiple assurance options available to you, and care coupled with patience needs to be executed in choosing the option that suits you best.

Ask your financial advisor to help you determine the correct product that will provide you with all the security you need.