Tag Archives: disability

Your greatest financial risk is not financial; it is physics!

Over the years as we have chatted to clients about financial planning we have settled down to the “big 5” risks that everyone faces and the resulting financial (and emotional) risks that they present to the person and their family. Simply put, these are (in no order of importance):

  • Dying too soon
  • Living too long
  • Disability
  • Funds for emergencies, and
  • Debt

A lot of the work that we have done with clients has been around identifying these potential risks and then implementing strategies to address them.

However, I have recently become convinced that there is a much greater risk that people face but that is hardly ever spoken about. I also think that this risk is likely to increase as the process of disintermediation increases.

Rightly or wrongly, Albert Einstein is often credited with saying that compound interest is the greatest force in the universe (or the 8th wonder of the world, or some other version thereof). And indeed, compounding is a significant force but I have become convinced that another scientist, Sir Isaac Newton, had much more to add to the debate.

Indeed, the “biggest” force that haunts people is to be found in Newton’s First Law of motion (you should have paid attention during science lessons). Newton One states that “a body will continue in its present state of rest (or motion) unless acted on by an UNBALANCED external force.” This is known as the rule of Inertia…or the tendency to do nothing or remain unchanged.

Simply put, we are all subject to Inertia and will continue to do the same things over and over unless we come into contact with an unbalanced external force. And that’s why people have personal trainers to hold them accountable to exercise and get them fit, that’s why we have seen an increase in the demand for life coaches and it is also the role of the financial planner.

Don’t get me wrong, I have no issue with people doing their own financial planning and/or investing. The problem is that they don’t! How else do you explain the father of 2 young kids who has no will 10 years after they were born, or the divorcee who has not changed beneficiaries on her life policy (or updated her will) or the employee who has not yet started saving, or the entrepreneur who has never submitted a tax return? I could go on…

The cold hard truth is that we are often our own worst enemies when it comes to things financial and it is my strong opinion that we all need an unbalanced external force in our lives to get us out of our inertia. As long as Newton’s First Law of motion holds, there will always be work for financial planners and for that I am very grateful! We have an incredible privilege as we help clients identify and manage their financial risks and then keep them accountable to address them.

 

 

 

Do I need a haircut?

“Do I need a haircut?” is not a question one normally asks a barber. Of course the answer will be yes. Likewise, “do I need insurance?” is not a question one normally asks an insurance salesman, especially when his/her income is derived from the sale of product.

Among the clients I meet there is traditionally a deep suspicion of insurance sales people and often (in my opinion) this is appropriate. All the statistics released by the life insurance industry point to the “fact” that people are generally under-insured. This may well be the case but I cant help but be suspicious of an industry that points out the general underutilization of the very product that it sells. It may well be that people are generally under-insured but I also hold the suspicion that among those that are insured, there are many that are in fact, over-insured.

Over-insured? How is that possible?

In my experience the greatest area of over-insurance is around disability and specifically income replacement cover. The usual scenario goes something like this…

The client is employed and is a member of the company retirement fund which has an income replacement disability benefit as part of the scheme. Typically this is 75% of the pensionable income (75% is international best practice – income replacement is never supposed to be an incentive to sit on the beach when you could be working). So for all intents and purposes the client is then insured to the maximum that he or she can claim.

In cases of over-insurance, the client also has some additional income replacement cover that they took out years ago (when they were still studying). They have stayed on the scheme because of the promised bonuses that they will receive some time in the future or on the mistaken belief that they will get paid if they are disabled and submit a claim.

If there is a valid claim, they will get paid – but not by both schemes. At claims stage, insurance companies typically aggregate the income received from all sources and will pay the balance of the 75% of income. So here is the problem and the over-insurance. If the external scheme pays, then the company scheme will probably not (to check this you can write to the company scheme and ask them how they would treat a claim in the event that you were also getting a benefit from the external (private) income replacement policy. They will write back and tell you that they will probably not pay. Probably not? What a waste of money – especially when statistically, your probability of being disabled is around 0.4%*. So why are you paying a(n addtional) premium for something that will probably not pay. You are over-insured and are wasting money!

As I see it, your group scheme membership is compulsory while the private scheme is not. So get rid of the external scheme – even if it means that you will lose some of the bonus – you could invest that money and the premium you were paying and you would end up with a bigger lump sum in the future.

* see the post https://www.thefinancialcoach.co.za/2010/11/19/statistically-unlikely-but/

 

Statistically unlikely…BUT!

According to research conducted by True South Actuaries & Consultants and the Unisa Bureau of Market Research, South Africans are hopelessly underinsured for death and disability. This is not new research or the first time that this conclusion has been reached. But what is new is that for the first time, at least as far as I can remember, they have actually released the numbers behind the research and as result we can know the number of working South Africans that are likely to die or become disabled in the next year. The research also showed that it is not the low income earners who are most at risk – in fact, consumers earning more than R16 500 are the most likely to leave their families with the biggest financial shortfall when they die or become disabled.

According to the research there are about 12.4 million working South Africans and of these about 52000 are likely to become permanently disabled in the next year. 52000 – that’s 142 per day!!! That’s a lot of people. When you do the maths, however, it amounts to about 0.4% of the working population…so it is statistically unlikely to happen to you (thankfully). But what if it does?

And that’s the question that needs answering.

As the major breadwinner in our household, my disablement would be financially devastating and so that’s why I have insured the risk through some income replacement cover. This, in my opinion is the best way to cover this kind of risk (and the premium is tax deductible). But before you rush out and buy this cover first find out what cover you already have through your company retirement fund or through your existing policies and please don’t cancel any old cover before you have new cover in place.

As far as the death rates are concerned, about 3 times as many working South Africans will die in the next year (160000). Again, you need to consider the financial impact of this on your family and if necessary, you need to take out some more life cover. It is not expensive – but please, stay far away from 1lifedirect and Outsurance Life. I will write more about them next week but their products are exceptionally expensive – despite their advertising “no brokers” and “no commission”.