Managing risk is the most important aspect to wealth creation. Should you be exposed to a risk and not have taken steps to protect yourself, you could end up financially ruined. Your long-term investments and retirement plan are like your baby - they are your future lifeline and should be protected as such.
Where do you start with risk cover?
Start by evaluating the things that generate income for you. Logically, your skill set is the first place to start, as this is what enables you to earn an income. Thus, taking steps to protect your income earning potential are vital, and insuring your income is the best way to do this.
Your income can be insured through something called Income Protection. This type of insurance pays you your salary if you are unable to work, whether permanently or temporarily. This is vitally important, as if you are disabled and cannot work for 6 months, or even permanently, as you will still be able to continue with your long-term investment plan.
The reality is that one in four South Africans are diagnosed with some form of cancer, of which 75% survive. If you have medical aid, then the majority of your medical expenses may covered, but there are many expenses that occur outside of the hospital that are associated with cancer. The same is true for strokes, cardiovascular disease and many other afflictions. These expenses can result in you having to sell off your assets in order to afford the bills. This can derail your entire financial future.
Similarly, being permanently disabled costs a fortune in ongoing medical expenses. Your Income Protection will not be enough for you to maintain your standard of living, meet your medical expenses and continue to invest for your retirement. A lump sum could be used in a multitude of different ways including settling debts, purchasing cash flowing assets or paying for uncovered medical expenses. Not having this lump sum available could be catastrophic.
The final form of cover to seriously consider is life insurance. This is only relevant if you have dependents. Life cover should be purchased to provide for your family and pay off outstanding debts in the event of your death. If you have a young family then you absolutely need life cover, at least enough to ensure that your spouse can pay off the house (or purchase one outright). Leaving your family with outstanding debts is something that is not only irresponsible, but it is very easy to avoid, simply by planning correctly.
If you have a pension or provident fund at your place of work, these may include some form of life cover. Be sure to include this in your calculation when working out how much insurance you need. You don’t want to be over or underinsured; finding the sweet spot can save you a large sum of money in premiums and protect your family against the unthinkable.
Medical aid and gap cover
Medical aid and gap cover are both essential, so don’t mess around. Don’t go crazy on the most expensive medical aid either - all you need is something that covers you for serious things such as diseases and major surgery. Typically I recommend a basic hospital plan with good quality gap cover which pays out around five times the medical aid rate.
In my opinion, I would rather spend money on having a large amount of dread disease cover than an expensive medical aid. If you are diagnosed with a serious condition then you will receive a large lump sum pay-out which you can use as you see fit, while the hospital plan takes care of the basic expenses. Dread disease cover is also more affordable than a fancy medical aid plan.
Simplicity is key
The final point on any type of risk cover is to opt for something that is simple to understand. There are some companies out there that require a PhD in encryption to understand what you are covered for and to what amount.
Policies that are linked to many other products such as your car insurance, medical aid and even banking are very dubious, in my opinion. If you crash your car or have a bad driving record that could push up the cost of your life cover, medical aid and disability insurance. This is totally unnecessary and unacceptable if you ask me.
At the end of the day, you want to know that if you need it, you will be covered. Complicated policies are made that way for a reason and they only benefit the company, not you as the consumer. What you are after is something that works and is the best value for money. Risk cover is a tool to protect you and your financial future; it should not be a money-sucking black hole that you have no understanding of.
In the next article of this series, I will explain retirement savings products in a way that is easy to understand.
Ricki specializes in the field of wealth management with a focus on holistic financial planning. He has a keen interest in the investment fields of property, technology, precious metals and cryptocurrencies. Ricki also holds a Masters degree in Science from the University of Stellenbosch.