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Life assurance is the most overlooked aspect of financial planning. Its importance for people tends to diminish as they build up wealth.
The majority of people have a serious need for cover because their realisable asset bases, as opposed to lifestyle assets, are so small that they will never adequately provide for financial dependants.
Traditionally, life-assurance policies have life cover as the underlying benefit to which a few additional benefits such as disability and dread disease cover were added.
So it is crucial to tailor an effective solution. We should also be thinking in terms of risk assurance rather than the concept of life assurance. A risk-benefit policy needs to be structured by giving consideration to a person's potential exposure to events that might have a serious financial consequence. The structure of benefits may change dramatically over the duration of a person's lifetime because of changing circumstances.
One needs to insure against events that, should they occur, would have a detrimental effect on one's finances. All the optional benefits need to be fully understood. In short-term insurance we often talk about under insurance or insuring for fire, but not burglary. With risk cover, it is critical that the correct structures are considered and that all core areas are covered.
The benefit payout needs to be appropriately structured. No one has any idea of the sequence of events that fate holds. One may suffer no illnesses and die peacefully in one's sleep at a ripe old age leaving no financial dependants. But one could also contract an illness, be injured in a motor accident, have a heart attack and die at a young age. Many policy holders may not be aware that where dread-disease cover is attached to a life policy, that on payment for a dreaded illness, the amount of life cover will be reduced. So should one die some years later, only the balance of the cover will be paid. For this reason it may be important to have stand-alone benefits so that one's cover is not affected. Also, once you have had a critical illness, getting life cover again is remote, if not impossible.
When taking out risk insurance, every aspect of your health needs to be disclosed or policies may be repudiated because of non-disclosure of critical information.
Each person's circumstances differ, but spouses should sit together and evaluate how much cover is required. One only has to look around to realise that the statement "it will never happen to my wife or husband" is a fallacy. Too many people are left without a spouse and with young children. I ask - where will the money come from?
l The writer is a director of Pioneer Financial Planning. Visit www.pioneer.co.za or e-mail firstname.lastname@example.org