Question

My wife and I are approaching retirement. We are in good health, have no debt, and have built up a reasonable nest egg. However, we are currently paying R15,000 per month for life and dread disease cover — and the premiums are increasing a lot each year.

We don’t have any dependents, so life cover seems unnecessary at this stage. We do want to keep dread disease cover. When I approached the insurer to cancel the life cover, I was told that the dread disease benefit would fall away too. What are our options?

Answer

This is a very common issue — and one I regularly encounter when I help people set up their retirement structures. What do you do with the life insurance that you don’t need but will use up a lot of your pension.

Many insurers still link dread disease cover to a life insurance policy, which creates a problem.   You want the dread disease cover but don’t need the life cover.

Before we start considering the alternatives, let’s try and understand why one would have this type of cover in the first place. 

 Life Cover

We usually take out life cover to cover any debts and ensure that our salaries are covered while we still have dependents in the house. 

If these needs are no longer there, and you don’t need to keep the cover for liquidity in your estate or to give to your children as an inheritance then it really does not make any sense to keep the life cover.  Because premiums generally increase steeply with age, you’re often paying a lot for a benefit you’ll never personally use.

Dread Disease Cover

Dread disease insurance covers all those additional medical costs that you have should you become really ill with a dreaded disease. It pays out a lump sum on diagnosis of serious illnesses like cancer, stroke, or heart attacks. The payout can help with:

• Out-of-pocket medical expenses not covered by your medical aid
• Alternative or overseas treatments
• Non-medical costs (e.g. home care, travel, accommodation)

As you get older and move onto a fixed income, the financial impact of a major illness can ruin you. That’s why this type of cover often becomes more relevant with age, not less.

Given that you don’t need the life insurance, but you do have a need for dread disease I would recommend that you consider one of the following options:

Switch to a stand-alone dread disease policy

There are insurers in South Africa that offer dread disease cover without tying it to life cover.
Since you are still in good health, this is worth exploring.  I’ve helped many clients get stand-alone cover in their 60s.

Self-insure

Another option is to carry the risk yourself by building up a fund to cover this type of expense. Before you do this, I would recommend that you speak to a decent financial planner.  You need to ensure that your medical aid and gap cover is robust enough.

If you redirected the R15,000 a month that you are currently spending on your risk cover, you would build up a fund of over R1,000,000 within five years if you achieved a return of 9% a year.  Once you are in that position, then you would not really need the dread disease cover as you will have the funds to meet a lot of those additional needs.

The risk comes if you become really ill in the first five year period.  An alternative option is to do this in stages.  You reduce your current  cover each year and invest the amount that you save in premiums.  Over a period of time, you will build up sufficient capital to allow you to cancel all the risk cover.

Continuing to pay escalating premiums for life cover you no longer need is probably not the best use of your money. Whether you get a stand-alone dread disease policy or begin building your own reserve fund, the goal should be to cover the risk in a way that’s sustainable and aligned with your stage of life. With a bit of planning and the right advice, you can retain peace of mind — without sacrificing your financial freedom.