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Life cover: How much is enough?

Even if life insurance forms part of your employee benefits, it will be wise to consider topping it up with a private policy to complement your current cover.

“Never put all of your eggs in one basket”: These are very true words, especially when deciding on investments and insurance cover.

A client in his late 40’s recently made an appointment with me; desperately seeking life insurance.  He already had well over of R1million’s worth of life insurance coverage; all managed by his employer.

Why was this such a big issue?

He hated his job.  It was super stressful and he was reaching a point of no return.

He wanted to quit his job, but it was impossible as he was the sole provider for his family and due to a serious heart condition, he was unable to obtain private life insurance coverage.

He was stuck in a job he hated because the thought of obtaining life insurance additional to the insurance his employer provided, never crossed his mind.

This is a just one example of why having only life insurance through work is a BAD idea.

Most people tend to think: “I don’t need more life insurance – I’m covered at work”. Not much thought goes into determining if this cliché is even valid.

Some employers do offer supplemental life insurance coverage where you have to pay the premium for the additional coverage. While this may sound like a good option, it will still keep all of your life insurance with a single source.

And that presents a number of problems…

What if you lose your job?

You may plan spending the rest of your working life in the same job, but that is not always feasible. According to the US Bureau of Labor Statistics (BLS), the average stay in one job has been 4.6 years since 2014.

One also has to bear in mind the possibility of experiencing extended periods of unemployment in between jobs. This becomes even more likely during recessions, when you may find yourself without a job or insurance coverage for many months. Due to separation or reassignment; the life insurance policy provided by your current employer will come to an end at some stage.

Though you may simply assume that you can postpone investing in a private life insurance policy until it becomes absolutely necessary, there could be a major complication…

What if you develop a health condition before you lose your job?

The standard advice on purchasing life insurance is to obtain it while you’re healthy. If you develop a health condition, and later lose your job, the option of purchasing a private policy could disappear.

Certain health conditions may prohibit you from qualifying for a life insurance policy, particularly if you have developed that condition fairly recent. And even if you qualify for a policy, it will include a risk adjusted premium, increasing the premium substantially.

Keep the life Insurance provided by your employer – but add a third party policy.

You certainly want to keep a life insurance policy provided by your employer, particularly if it’s one that you don’t have to contribute to. However, any additional coverage ought to be independent from employer benefits.

Diversification as an investment strategy

Obtaining more than one life insurance policy from more than one separate entity increases your financial situation.

The services of a financial advisor will not cost you any more than buying the policy directly from the life insurance company.

Your financial advisor is qualified to handle all the paperwork and nuances that are part of  the application process – which you are probably totally unfamiliar with.

Thanks to his/her expertise and experience you will be provided with the best policy for your needs at the lowest possible premium rate.  In other words: you actually save money on your policy.

When in future you need additional insurance or you might decide to change the content of your policy; your financial advisor will be there to guide you through the process.

Why you should lock in your rate on a private policy as soon as possible

Developing a health condition before you lose your job is not the only obstacle you may face in obtaining a private life insurance policy. “There is no time like the present”: This is the most important reason not to delay the purchase of a private life insurance policy:

Your life insurance premium will never be lower than today’s premium.

Age is one of the major factors in determining life insurance premiums. If you are 30 years old right now, the premium on a private policy will be much lower today than it will be when you’re 40 or 50.

By locking in the premium rate on a long-term life insurance policy now, you not only save higher premiums that will come with age, but also prevent the possibility of being declined a policy due to poor health.

In conclusion

“I don’t need more life insurance – I’m covered at work”. This assumption could be hazardous to your family’s financial health.

Consult an independent financial adviser for a complete analysis and full diversification of your portfolio.

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