Imagine wanting a red car, but buying a green one because you can always paint it red afterwards? That’s exactly what South Africans are doing when it comes to taking out life insurance: they’re purchasing lump sum cover in the hopes that should they pass away, their loved ones will continue to be provided for financially with an income.
Although lump sum life cover makes up nearly three-quarters of all business written by the industry, an income benefit is the better way to look after your loved ones when you’re no longer around, says Leza Wells, Chief Product Actuary of life insurer FMI (a Division of Bidvest Life Ltd). FMI is at the forefront of a move towards life policies that pay out benefits as a regular income, rather than a once-off lump sum, allowing you to meet the ongoing needs of those who depend on you, even after you have passed on.
“The great thing about income benefits, rather than a lump sum, is that you’re able to match your loved ones’ needs exactly. With a lump sum, you have to predict future inflation rates and investment returns. With income benefits, if they need R20 000 a month, you leave them R20 000 a month growing with benefit escalation,” said Wells.
This could mean leaving a monthly income to your spouse, so they never have to worry about paying the household bills. Or selecting an income amount for a specified period, to ensure your children’s education costs are covered. As a single or divorced parent, your biggest concern would be your children if you were no longer able to take care of them. Life Income ensures your children receive a monthly income in the event of your death.
Case in point: FMI client John R., who passed away last year at the age of 41 as a result of a motor neuron disease. John took out Life Income cover for his twin daughters five years ago, before his diagnosis. His daughters, now 10, will receive R5 000 each a month until they’re 24, with escalations for inflation. “It makes one realise anything can happen at any time, so the sooner you take out the right cover, the better,” says Wells.
Beneficiaries left with a Life Lump Sum benefit are faced with the challenge of not only trying to calculate future inflation and interest rates but along with that, also deciding on the best way to invest their money to ensure it’ll produce an income for the rest of their lives. Many may also be tempted to spend their money on luxury goods or things they don’t necessarily need, overestimating how much money they actually have.
That’s why income benefits are the best possible solution when it comes to life cover, says Wells. Benefits can be tailored to ensure secure estate liquidity solutions, education cover for minors, or simply cover for day-to-day living expenses. Alternatively, a Whole-of-Life option can be selected to pay a beneficiary for the rest of their life.
Once you have secured your loved one’s monthly income with a Life Income benefit you can add a small amount of Life Lump Sum cover for those additional or once off expenses such as estate duty or executer’s fees.
“The bottom line is that the best way to replace an income stream is with another income stream,” says Wells. “Life Income cover removes the risks inherent in lump sum payouts, while ensuring that you will always have enough to cover your monthly expenses.”