The critical role of comprehensive life insurance as part of proper estate planning

Life insurance is probably the easiest and most inexpensive way of leaving a legacy.

Did you know that up to 50% of current wills do not result in the desired wishes as intended by the person who passed away?

This often places severe additional strain on dependants at a time when they are struggling to come to terms with the loss of a loved one and now are forced to deal with the further burden of practical financial realities.

Proper estate planning contributes significantly to easing this burden. One of the key tools in your estate planning arsenal should be comprehensive life insurance with a reputable provider.  

The intention of this article is to:

• Provide you with a brief overview of the role of estate planning;
• Highlight the critical importance of comprehensive life insurance as a key component of your estate planning activities; and
• Explain the process for completion of the life insurance application to avoid the risk of future repudiated claims.

What is “estate planning”?

“Estate planning” is the exercise of testing the wishes in your will against how reality will play out when you pass away. It answers the question: “What happens to my estate (everything you’ve accumulated during your lifetime) when I die?”

It may sound like a grim exercise and not something you’re wildly excited about tackling at this point, but having the confidence that all your dependants will be taken care of and that there will be sufficient liquidity in your estate to cover all expenses, should bring welcome relief and contribute to peace of mind for you and your loved ones.

Estate planning is especially important for people who:

• are married (or have been married multiple times);
• have minor children or financial dependants;
• own significant assets or have liabilities;
• are business owners with obligations and sureties with financial institutions; and
• have estates (investments/properties, etc.) in other countries.

How is estate planning done?

We start with a mock execution of your current will.

And here’s the interesting (scary?!) part: Often, when we present the findings back to the testator/testatrix, it’s likely that five out of 10 wills will not be a true reflection of the testator/testatrix’s wishes, mostly due to unforeseen financial obligations. This could be due to debt; death duties (tax); sureties, or simply the cost of winding up the estate.

It is this “nasty” surprise that those who have recently lost loved ones end up having to face at a time when they least want to deal with practical financial realities.

Please note:

The intention of this article is not to go into the intricate details of an estate plan, but merely to highlight that this is a very complicated area that needs to be addressed by all those who fall into one of the categories mentioned in the list above. Should this describe you, we strongly urge you to make an appointment to have a detailed analysis conducted by an expert.

The critical role of comprehensive life insurance

There is, however, one aspect of estate planning that is possible to implement and manage to ensure your immediate peace of mind when it comes to potentially burdening others with your financial obligations on your passing – the investment in a life policy (or life cover/insurance).

Imagine the following scenario:

Let’s assume you’ve completed the estate planning exercise and then redrafted your will to optimise the distribution of your assets and limit estate duties as far as possible.

And now, let’s assume your estate still shows a liquidity shortfall or that your assets are not sufficient to look after your financial dependants or to cover your financial obligations. 

What can you do to prevent this situation and ensure that your house is in order when it comes to your financial obligations? 

Taking out a life policy (or life cover/insurance) is an immediate solution to addressing this concern. 

We have no doubt that you already know about (or have been told about) the importance of life cover but have probably also heard the horror stories of these claims being repudiated or rejected after the testator/testatrix’s passing.

Our experience with implementing and managing this range of financial products over the years has taught us some key lessons when it comes to applying for, and claiming from, your life cover. We share two of them with you below and then unpack the details further in the remainder of this article:

1. Application for a life policy should be comprehensive, honest, and accurate to determine your most suitable cover needs. Using an independent and experienced financial advisor/planner for this exercise will guarantee the selection of the most relevant product for your specific needs and context.
2. While it is a common narrative that insurance companies will actively look for reasons not to pay a claim, in our experience, this is not the case if the application and claim were done properly. Insurance companies want to pay claims, but this needs to be done on a fair and equitable basis as it affects all the other clients on their books. This ties in with the principles of openness, transparency, and accuracy during the application and claim phase.

The rest of the information in this article explains each of the three stages of life cover, along with key insight into how to ensure that your application and claim are fairly processed for the best possible (and least cumbersome) outcome right from the start.

Stage 1: The quotation stage

How it works:

Once you’ve consulted and received advice from an independent financial advisor/planner about your particular needs, you’ll be presented with options for consideration. On your acceptance of the most suitable option, the application for cover is submitted to the relevant insurance company.

The insurance company will review your application and sort you into a risk category to determine your premium (this is called your first claims risk) based on a combination of factors. These include:

• Your age.
• Your highest qualification (Matric/grade 12; diploma; degree, or higher degree)
• Your occupation.
• Percentage time spent in a working day on certain activities such as administration; supervision; travel, and type of labour (light or hard physical labour).
• Monthly gross income.
• Whether you participate in hazardous activities (such as rock climbing; skydiving, etc.).

Once this information is entered into the system by the insurance company, you will be categorised into the average (in health) person of that category.

What’s key to remember at this point?

If any of this non-medical information is inaccurate at the quotation or application stage, it could affect your eventual claim. Non-disclosure is not only withholding important information but also supplying misinformation. We understand that this can easily be done without the intent to do so but advise clients to be fully transparent to ensure full coverage. This will have a direct impact on the processing of the claim later. 

Stage 2: The application stage

How it works:

After the quotation stage, the insurance company will assess whether you’re of average health for your risk category or in better or worse health. This part of the process is referred to as medical underwriting and is your second claims risk.

Did you know?

Some good news for those of you who are healthy – insurance companies may offer you a discount on your premium if you are above average in health!

The process starts off with a health and medical history questionnaire. This is to allow the insurance company to assess whether covering you would place them at a higher risk than what they originally quoted when offering you the monthly premium option in the previous stage. The reality is that certain health conditions can be fully recovered from, while others place you at a permanently higher risk. These conditions are the ones that the insurance company want to know about.

The problem is that we don’t necessarily know what those conditions are as most of us are not doctors (or fortune-tellers) and we sometimes forget to mention health conditions that we might think insignificant. In the insurance world, this is called non-disclosure and will have a direct impact on the payment of your later claim. Non-disclosure doesn’t mean that you wilfully misled them or withheld information – it simply means that the insurance company didn’t have ALL the relevant information to assess your risk level. We therefore cannot stress enough the need to be fully open and transparent about your health history and status during the application stage.

Once the insurance company has assessed your health level, they will ask for additional information from your doctor(s), including but not limited to the following:

• HIV status.
• Cotinine test (a blood test to ascertain whether you are indeed a non-smoker when that is what you declared).
• A short medical questionnaire to be completed by your general practitioner (GP).
• A comprehensive medical questionnaire to be completed by a treating doctor (this could be your GP, or it could be any specialist(s) you might have consulted if you have existing, treatable health conditions).
• Condition-specific questionnaires, typically to be completed by a specialist (for example, if you have a history of headaches and consulted a neurologist).

P.S. Don’t worry, the insurance company pays for these tests and reports!

Once the insurance company has all this information, they will make a call on whether they cover you:

1. At the original premium you were quoted: This would be the case where you are deemed of average health with no major risk to them;
2. At a loaded (increased) premium: This would be the case where they believed you present a higher risk than what was presented during the quotation stage; or
3. With exclusions of certain illnesses/conditions: These would typically be the more serious health conditions that you normally don’t recover from.

If any amendment to the original terms and premium offer (from Stage 1) is made, the insurance company will issue a counter-offer letter. You will then have an opportunity to consider this new offer and accept or decline the adjusted terms.

Stage 3: The claim stage

Now, let’s assume that the application stage has been successfully concluded, with the quotation accepted and regular premiums paid accordingly.

Fast-forward into the future and assume that you (the insured person) pass away or become permanently disabled because of doing your regular occupation.

What is the process for claiming? 

The first thing that needs to be done is to notify the insurance company or your financial broker/advisor of the claim. They will provide you with the details of the documentation that needs to be submitted which includes the following:

1. The death certificate indicating the cause of death (this is important as the insurance company will require additional information if the cause is stipulated as natural causes).
2. The claim form.
3. A copy of the identity document (ID) of the deceased.
4. Copies of the ID of the beneficiary/beneficiaries.
5. Proof of bank details of the beneficiary/beneficiaries.

One of the questions the insurance company will always ask on the claim form is:

“When did the deceased first consult a doctor for his/her last illness (potentially the one that caused their death) and who did s/he consult?”

The reason they ask this question at the outset is to determine whether what was declared on the application corresponds with the information provided by the claimant. They will obviously request further information from the attending doctor, but if the insured person consulted a doctor for the illness that caused his/her death before s/he took out the life policy and s/he did not declare this on the application, it will be regarded as non-disclosure and potentially have a repudiation of the claim as a result.

In conclusion

Life insurance is probably the easiest and most inexpensive way of leaving a legacy. An unencumbered life policy pay-out directly to your intended beneficiaries can significantly ease the financial burden on those left behind.

If you require any advice on this subject, please don’t hesitate to get in touch with us. We look forward to hearing from you and working towards a solution that meets your current – and emerging – needs.