By Ryan McCaughey
In this month's article, I'll go into more detail about the importance of risk cover, as well as its benefits throughout your financial journey. Although risk cover – which insures against premature death, disability, or some form of incapacity – is always a grudge purchase, there is often no better means of securing your financial future or that of your family.
What is risk cover?
The importance of risk cover in personal financial planning is often overlooked given its perceived complex nature and the monthly financial commitment for an event that you hope will never occur. Risk cover is a long-term insurance product that provides financial protection in the wake of significant life events such as death, critical illness, and/or disability – there is no one-size-fits-all option. The true value of having risk cover in place is often only realised when an insurable event takes place, and financial support is required in time of need.
Financial protection is achieved through the payment of a monthly premium. The insurer will pay an agreed amount should a claim event occur. The monthly premium is based on your risk profile, which the insurer determines during the underwriting process. Criteria taken into account during the underwriting process include age, sex, health, social habits, income, and education.
Types of personal risk cover
Personal risk cover comes in three main forms, with each playing a vital role in mitigating risks to retiring comfortably or providing for your loved ones.
1. Life cover is a lump-sum payout in the event of your demise. It can effectively be used to make a capital provision for a family member, provide an income need for your spouse and children, provide security for a home loan, settle any form of debt, or provide liquidity in your estate. Life cover is an effective estate planning tool often overlooked when structuring a financial plan.
2. Disability cover can take two forms – a lump-sum payout or an income protection benefit. Lump-sum cover requires careful planning to ensure that the lump sum is adequate for your long-term needs. Income protection is an excellent way to protect your earnings. Most income protection policies come in the form of temporary and permanent cover. This is usually an expensive cover to keep in place; however, it's a great way to cover you for future living expenses and retirement needs.
3. Critical (severe) illness cover is a lump-sum payout if you are diagnosed with a critical illness such as cancer, heart attack, stroke, multiple sclerosis or Parkinson's disease. Critical illness cover essentially helps alleviate the financial stress so that you can focus on managing your illness.
Points to consider when taking out risk cover
The following questions need to be carefully considered for risk cover to achieve its intended purpose in your overall financial plan.
- Is your risk cover appropriately quantified?
- Is your risk cover appropriately structured in terms of ownership?
- Have you correctly nominated your beneficiaries?
- Have you carefully considered the various premium patterns and how they escalate over time?
- Have you considered the different types of cover and is the cover comprehensive enough for your needs?
As your circumstances change over time and as you move through life's various stages, it is essential to review the risk cover you have in place, ensuring they meet your needs. Engaging the services of a Certified Financial Planner can play a vital role in providing professional risk cover advice and ensuring you are appropriately covered.
Next month, I'll continue to offer my perspective on a sound financial plan, focusing on the importance of short-term insurance to stay informed and empowered when managing your financial well-being.
Ryan McCaughey, CFP, is a director of Hewett Wealth and is the Financial Planner of the Year 2021/22.