Episode 32 : Cover for the Life You Live

Michael Avery
Well, there are certain things in life that nobody particularly enjoys paying for. A colonoscopy is one of those, right? Perhaps somewhere near the top of that list is insurance. Risk cover asks us to do something psychologically quite difficult: give up money today to protect our future selves against an event we desperately hope will never happen. Sometimes we persuade ourselves it will never happen, so we call it a grudge purchase, until suddenly it does. A few episodes ago, Kim and I sat down with Glenn Baker and heard, in extraordinarily human terms, what happens when a serious diagnosis arrives completely left-field and uninvited into your life. That conversation prompted today’s guest, financial planning specialist Jordan van Dongen, to write about something we perhaps do not discuss enough. It is not simply whether you have insurance, but whether you have the right cover, in the right amount, for the life you are actually living today. One of the great misconceptions about risk planning is that the biggest financial catastrophe is dying. Sometimes, I think the much bigger financial challenge is surviving. Jordan, welcome to Life Chapters, Money Choices. As always, we are joined by Kim Potgieter as well. Kim, this also feels like one of those conversations where we are going to try to make insurance simultaneously useful and human, perhaps even mildly interesting. No pressure there. Jordan, perhaps you can kick us off. Let us begin with your phrase, because it is really honest. Why does risk cover feel like such a grudge purchase?
Jordan van Dongen
Sure, yes. Thanks, Michael, and thanks for having me on. I think you hit the nail on the head at the beginning. The premiums do something psychological to us. You are paying for something while picturing yourself with that illness, or picturing yourself dying. I suppose that is one reason it feels like a grudge purchase. Another reason is that, if you compare it with an investment, when you never claim, you never get anything. With an investment, although you see your premiums going away, you always have something at the end. So, apart from telemarketers calling us every day, simply thinking about what that premium means is probably why it feels like a grudge purchase.
Michael Avery
Yes, and it is also expensive, Kim. Just to bring you in on this point, if we are talking about life insurance, for example, it is not cheap.
Kim Potgieter
It is not. So many times, Michael, when we sit with a couple, particularly an older couple, they are short of having enough money to fund their lifestyle in retirement. You then start the conversation: should we be putting money into insurance, or should we be investing it? Many of us spend much of our younger years paying for insurance because we have dependants. Later, the question becomes: do we simply cancel it and let all the money we paid come to nothing? Or do we refocus that money into investments because we need enough liquidity to live on? You mentioned our interview with Glenn and how he shared that insurance had helped him. This week, I sat with a couple who had made the big decision to cancel their insurance as they grew older because they wanted to put the money into investments instead. The husband has now been diagnosed with bladder cancer. With the diagnosis came all the additional costs. They were not only dealing with the diagnosis, but also with expenses and a lack of income or a disability payout. Instead, they were having to draw from their investments to pay for everything. I heard the extra level of stress that brought into the family. We cannot judge and say they made the wrong decision. They made the decision they thought was right. Who knew what was coming? But it really struck me.
Michael Avery
That is why I think we sometimes do not fully understand or appreciate the risk. Jordan, when you sit with clients, do people generally understand the risk intellectually but still resist spending the money emotionally? How do you have that conversation without frightening people into buying insurance? The risks are real.
Jordan van Dongen
Yes, for sure. When we go through our process at Chartered, we build something called a risk plan. That is where we look at this question: if something happened to you yesterday, what would you need today? That is where risk planning comes in and why it is so vital, because you can answer all those questions. If I were diagnosed with a serious illness, we could project the costs and overestimate them to be on the safe side, but we could establish what I would need. From that point, the client can understand the risks involved and what they need. People often place a lot of emphasis on life cover, but I think the real gap is in the cover you need if you stay alive. That relates more to critical illness, disability cover and income protection.
Michael Avery
Yes.
Jordan van Dongen
That is where I think the big gap lies. People do not give that enough priority compared with life cover.
Michael Avery
Kim, one of the things Jordan raises, which we often discuss on this podcast, is creating financial space around difficult life transitions. What happens if the news you receive does not mean you are going to die, but your life fundamentally changes? You may have to stop working and undergo intensive chemotherapy or something similar. Is that perhaps the best way to think about insurance? It cannot solve the crisis, but it can give you choices when your life has suddenly become very small and frightening.
Kim Potgieter
I totally agree. It is important to have these conversations when you are not emotional. Insurance already has a bad name because of telesales, with people phoning and trying to sell something or keep you on the line. People have also been sold cover they did not need because of commission-based models. When you raise the subject, people can already feel defensive because they think, ‘Hang on, you are not going to sell me something.’ The aim is to create a space where they are not emotionally triggered and where the discussion is not fear-selling. It is about making an informed decision. If that decision shows it would be difficult to fund yourself for a year, that matters. People are living much longer and more medical care is available, so they are not necessarily dying when they develop a serious illness. They may live for much longer. To heal fully, however, you need to be able to take your foot off the pedal. You need to be able to avoid stress and stop working. There is nothing worse than being overwhelmed by financial stress while going through a critical illness, when stress is the last thing you need. This gives you a choice. It is not fear-buying or fear-selling. It is proper financial planning.
Michael Avery
Yes, and I have first-hand experience of the peace of mind it can buy. My partner suffered a stroke, a cerebral venous sinus thrombosis. It is one of those events that makes you think almost immediately: what happens now? You survive, but you cannot return to work. You receive the diagnosis and you are thankful to have medical aid, but what happens after the medical process? What about rehabilitation? Can you earn an income? Fortunately, she had very good cover in place. It continued to pay her income and her retirement annuity, which it still does today because she could not return to work. It influenced her ability, and the entire family’s ability, to focus on getting her healthy and through rehabilitation. Jordan, coming back to the risk plan you build with clients, where do you start? We will discuss the different types of cover, but do you broadly buy as much cover as you can afford? Most people want to know whether they have enough cover. They are aware of the risks, but also of the trade-offs. Every rand spent on cover is another rand not going into the bond or a fund for overlanding through East Africa, for example.
Jordan van Dongen
We work through each possible event. Starting with life cover, we ask: if you died, how much life cover would you need today? A family with young children probably needs the most life cover. If you die, those children still need schooling and help until they become financially independent. You may also need to cover a spouse’s expenses until retirement. We work through each benefit and start by calculating full cover. You can insure yourself for almost anything, but complete cover comes at a cost. We ask how much cover would be needed for absolutely everything and then what that would cost. It is generally too expensive, particularly for families with young children and significant expenses over the next 30 or 40 years. We then bring it back to what is affordable and ask what level of risk the client can accept. Income protection is one thing we probably would not forgo because it may be the most vital cover. Life cover, however, can potentially reduce as you build wealth and begin to self-insure. In short, we calculate the maximum and then bring it back to what the client can afford and the risk they can accept.
Michael Avery
Again, it is life-stage based. If you are a young family starting out with young children, you genuinely need life cover. Its job is to ensure that, if you die, your surviving spouse and children are not left in the lurch. Let us talk about critical illness. Many people may think, ‘I have medical aid. Why do I need critical illness cover as well?’ What does it do that medical aid does not?
Jordan van Dongen
I suppose it does exactly that. It covers what medical aid does not. Ultimately, it pays you a lump sum if you are diagnosed with a critical illness. That money goes straight into your account and you can use it as you choose. Most often, it pays for expenses medical aid has not covered. If someone goes into hospital, the first thing you think is, ‘I hope they have good medical aid.’ You do not think, ‘I hope they have good risk cover.’ Glenn’s podcast was a perfect example of where critical illness cover came in, because medical aid only goes so far and then you are left with a significant gap. That is where critical illness cover helps.
Michael Avery
Kim, as I understand it, critical illness cover generally pays a lump sum rather than money specifically earmarked for doctors or hospitals. Could I use it to pay the bond or fund treatment overseas? Could I use it for almost anything?
Kim Potgieter
You can. It could support a six-month break to heal and recover, pay the bond or fund treatment. As you said earlier, Michael, it gives you choice. We have to accept some risk in life, because insuring ourselves against everything would be far too expensive. But if you understand the risk and calculate it into your plan, you know what will happen if the event occurs. The couple I mentioned were very emotional and distressed. My husband also had bladder cancer, but we had life insurance and could afford to fund the other costs ourselves. She asked me what we paid and how much everything cost. I realised I did not even know those numbers because it had not been a stressful issue for me. For them, it was a significant concern. Having provision in place meant it was one less thing I had to worry about.
Michael Avery
You cannot underestimate how stressful periods like this are. Sometimes we are subconsciously aware of the risk. If we do not have cover in place, we may not realise the anxiety it puts on our shoulders. When you plan for it, map the risks and put the cover in place, there must be a sense of relief, whether conscious or unconscious. Jordan, I want to come to income protection. This may be the most important cover for working people and the vast majority who listen to Life Chapters, Money Choices. If my greatest financial asset at 35, 40 or 45 is not my house or retirement fund, but the next 20 or 25 years of earnings, should protecting that income be higher on the priority list than many people realise? Where would you place it, and how should someone approach income protection cover?
Jordan van Dongen
I would put it near the top. I might receive some criticism for that, but as a young person, it is something you need to protect and it is extremely important. My biggest fear is having an accident and not dying, leaving my family with the burden of looking after me for the rest of my life. Income protection is therefore high on the list. It is probably the easiest cover to value because you look at what you earn and insure that amount. From the insurer’s perspective, it is also probably the most expensive cover. If I am in my thirties, the insurer may need to pay my income, with increases, until I am 65. That cost is potentially why people avoid it.
Michael Avery
It pays your income for whatever period remains until retirement. Does it also cover contributions to a retirement annuity, for example? To get a better handle on how the monthly premium works, does it reduce on a sliding scale as you approach retirement?
Jordan van Dongen
Not necessarily, because your income is increasing. The gap often arises because an insurer may apply a 6% inflationary increase to your benefit. If you receive a promotion or your income increases by more than that, you are left with a gap. That gap compounds. If I receive a 10% increase for the next three years, but my cover increases by only 5%, and I become disabled in the third year, the shortfall compounds for the rest of my life. That is why regular reviews are exceptionally important. Kim?
Kim Potgieter
The point I wanted to add, which Jordan and I have seen in real circumstances, is what happens when someone sells you income protection for more than you actually earn. Insurance companies have actuaries and will investigate. You must be truthful about what you earn. There is no benefit in insuring yourself for a huge amount that does not reflect your real income. They will investigate what you earned and whether you are genuinely unable to work. Some people try to do a little work on the side, but these claims represent a significant cost to insurers and they will do their homework. Work with someone who gives you a plan based on reality, not on an imagined figure designed to earn more commission. Be precise with your numbers and be realistic.
Michael Avery
Absolutely. I think that applies to all insurance. Honesty is the best policy. I have heard of something called capital disability. Jordan, why would someone need a lump sum if they already have income protection?
Jordan van Dongen
Capital disability plays a different role. It is not there to protect your income. It is there to help ensure that your life can continue. Let us say I became disabled and lost both legs. Capital disability would pay me a lump sum, intended to make my life going forward a little more comfortable. As with critical illness cover, you can use it as you choose, but its real purpose is to help you adjust your life to what it will now be.
Michael Avery
Yes.
Jordan van Dongen
To what it is now going to be.
Michael Avery
What about someone who says, ‘I work behind a desk. I am not a surgeon or a professional athlete, so my risk of a career-ending injury is low’? Why would that person need disability or income protection? What conditions do you see causing people to stop working?
Jordan van Dongen
It can be almost anything. Take the example of someone who sits behind a desk all day. If I lose my arms, I cannot type. If I go blind, I cannot see a screen. It comes back to what your life will be like going forward and how you will accommodate that.
Michael Avery
I can imagine what would happen if, heaven forbid, I developed throat cancer and could no longer speak. That would affect my ability to earn an income. We now come to something potentially dangerous: believing that because you have a policy, you are adequately insured. You may have taken it out ten years ago. As you mention in the article, someone might have bought income protection while earning R30,000 a month. Ten years later, they earn R80,000 a month, but the policy still reflects the old framework. How often should people review their cover?
Jordan van Dongen
There are several triggers for reviewing risk cover immediately, particularly when something in your life changes. That could include buying another house and taking on another liability, having another child or getting married. Those are significant moments to review your cover. As part of a regular review, check that everything is still aligned. But when something changes materially in your life, you should look at it straight away. It is similar to reviewing your will. Think of it as a health check for your risk cover.
Michael Avery
Kim, when you sit down with clients, what are the most common mismatches? Is it too much life cover or too little income protection? What planning gaps do you see most often?
Kim Potgieter
Because I work with older people, I often see clients assume they no longer need cover as they age. The conversation can also include whether you support your parents. You may have enough for your spouse, but still support your parents. Life insurance could provide for them so that responsibility does not pass to your spouse. Another common conversation concerns adult children who may not yet be looking after themselves as well as they should. They may not have adequate cover because they are young and have many expenses. In the sandwich generation, insurance can protect other generations too, because parents and children do not want to see their family go without. Education is therefore important. Young adult children, whether in their twenties or early thirties, need to understand the cover they should have because these decisions affect generations. It is a broader conversation than what I need for myself right now. It includes all our dependants and everyone for whom we are responsible.
Michael Avery
That is why I love the concept behind this podcast, Life Chapters. At each life chapter, including a first proper job, marriage, a first child, buying a house, building a business, divorce, children leaving home or approaching retirement, life triggers a different conversation about financial planning and insurance cover. Jordan, if you could leave listeners with one question to ask themselves about their own risk cover, what would it be?
Jordan van Dongen
The first thought is to change the way you think about risk cover. Kim pointed it out earlier: with risk cover, you are buying time until your wealth can take over. It is not necessarily something you buy once. It is part of the plan. The question I would leave everyone with is this: if something happened to you yesterday or today, are you sure your family would be completely secure? Are you sure you would be completely secure?
Michael Avery
That is a very good point. Kim, insurance companies are businesses and employ actuaries. Complexity, exclusions, commissions and historical incentive problems have created distrust in the industry. How should we interrogate our insurance and the recommendations we receive? What should we ask before signing a policy?
Kim Potgieter
That is a very good question. Ask what the adviser earns from the product you are buying. I believe we should pay for advice, but we must actually receive advice. If you are buying from someone who is simply selling to you, you need to question that. Put more time and effort into finding someone who gives you a plan and then recommends a product to support it, rather than someone simply trying to sell the product. For me, it is about what they earn and how they earn it. The public is not always educated about what they are paying. People may not realise how much they pay for what they receive, and then they do not receive advice. You need advice for what you are paying.
Michael Avery
Yes, and the advice is why it is so important to have a good financial adviser, someone who is a partner on this journey and understands the industry. It levels the playing field, removes the asymmetry of insight and specialist knowledge, and allows you to ask the right questions with confidence. I think that is where we are going to leave it for this week. There is an odd irony to good insurance. If life treats you kindly, you may spend years wondering whether all those premiums were wasted. Perhaps that is the outcome we should hope for. Today’s conversation is a reminder that risk planning is not really about predicting disaster. It is about making sure that one bad chapter does not rewrite the entire financial story. Jordan van Dongen, Financial Planning Specialist at Chartered Wealth Solutions, thank you for joining us. Kim Potgieter, as always, thank you so much. I am Michael Avery. This is Life Chapters, Money Choices. Until next time, plan for the life you want, but leave some room in the plan for the life you never expected.