Q: I am 30 years old with no dependants. I earn a salary of R30 000 a month. I recently started working at a small company that does not offer any additional benefits. I have a pension fund and medical aid, but it seems I may also need to get dread disease and disability cover and income protection. I have obtained some quotes, but was quite stunned to see that a premium of roughly R750 a month will only provide me with about R1 million in dread disease and disability cover. To pay R750 a month seems like a lot of money.
Is R1 million in dread disease and disability cover enough for someone like me? How can I determine how much cover I need? Should I not rather use the money and invest it in shares or a unit trust?
A: Dear Reader
Financial planning is a creative process. Even though many industry experts have spent countless hours attempting to formulate a winning recipe, there is no universal solution or formula that works for all. You have to formulate a solution that addresses the needs of your unique situation.
Secondly, for you to plan properly you need to put all your cards on the table. Consequently, when inquiring about whether your plan, product or solution choice is appropriate, the person helping you needs to see all the detail in order to make a proper and accurate judgement.
Engaging with a trusted financial advisor will help you to do this properly. If this individual is able and willing, it should be a very interesting exercise where you will surely benefit.
Before I answer your questions, I would need to know what you are ultimately trying to achieve. Aiming to be in a position at age 65 where you will be able to stop working and continue earning your present income is a healthy starting objective.
Assuming then that you are starting from scratch (no investment assets and no debts), you need to calculate what you need to invest monthly to reach your goal. Based on reasonable assumptions, if you invest about R4 000 per month and escalate these contributions annually by 10%, you should be able to reach your goal.
You mention that you have a pension fund. If your contributions allocated to this retirement fund (specifically excluding administration and other fees) don’t add up to R4 000 per month, you already know that you have a shortfall. Get professional help to assist you with choosing the product and fund(s) with which the shortfall will be addressed. There are many things to consider.
Implementing this seems straight forward, but unfortunately it is not that simple. What if you lose your job, become ill, or get involved in an accident and you lose your ability to generate the income with which you fund this plan? Most would agree that such events will rock your boat, and might completely destroy your hopes of achieving the primary goal.
Acknowledging these risks will enable you to realise that you need to plan for the worst, and hope for the best. Logically, it becomes sensible to ensure that you have income protection cover that will replace your income on a temporary and/or permanent basis if you become unable to perform the duties of your job. Ensure that the selected cover amount covers all your monthly expenses.
Based on what you have shared I have no urgency with which to encourage you to apply for life cover. Just remember that your insurability is not a guarantee and that it is advisable to apply for life cover while you are young and healthy.
Dread disease and disability cover are both lump sum benefits that I think you should have.
I recommend dread disease cover for the simple reason that we are all at risk of contracting a severe illness. No one can with certainty assume that it will never happen to them.
Dread disease cover is a more expensive benefit than disability cover. It pays out a lump sum on the diagnosis of a severe illness. If you have a proper medical aid, I would not recommend more than R360 000 of cover (1X annual salary). Ensure that you select a comprehensive benefit from a reputable insurer and that the product covers you whole of life. A cheaper option will let the benefit cease at 65. Your likelihood for a claim on this benefit increases with age so do not cease the cover when you might be needing it the most.
Consider applying for R720 000 of disability cover (2X annual salary), plus the total of your debts. This benefit pays out in the event of permanent disability and is intended to cover immediate capital expenditure as a result of the event. Ensure that you understand the finer detail of the product selected, and do not merely grab the cheapest solution. A cheap benefit is cheap for a reason.
You mention that a quoted premium of R750 per month seems a lot. Have you shopped around? What premium pattern was chosen? Were comprehensive benefits quoted?
Also remember that your age, education, occupation, smoker status, gender and income all have an impact on the premium. A 30-year-old non-smoking female, with a master’s degree, doing an administrative job and earning R50 000 per month will pay a lot less for insurance than a 30-year old smoking male with matric, being a driver, and earning R10 000 per month – for the same benefits!
Clearly there is a lot more to consider than I think you initially thought. Good luck!