Have you ever wondered what your adviser really gets paid for selling you a life insurance-related product – including disability and dread-disease cover?

“If you were to remove the cost of the broker,” says Jan-Carel Botha at Pretoria-based Ultima Financial Planners, “the cost of many of these policies would decline by up to 30%.”

Sure, there are good advisers intent on building long-standing, mutually beneficial relationships – but the structure of remuneration in the industry creates the potential for a commission-based feeding frenzy among the less ethical operators.

“One of the main reasons why most South Africans have far too little income protection in particular is affordability,” says Bart Wouters at specialist insurer AltRisk, “the premiums simply make up too big a piece of their monthly disposable income.”

“The reality is that the more insurance cover you buy, the less money you have left over to make sensible investment decisions,” says Acsis’ Van Deventer.

How much is too much?

There’s also the risk of being sold too much insurance.

What he calls “accumulators” are most vulnerable to the sales pitch. People in the early stages of their career with substantial liabilities are sold high levels of cover with automatic annual premium increases built in. All too often they do not reassess their needs. Years later as their liabilities are reduced and their asset base is more substantial they are able to better withstand temporary setbacks and should be insured accordingly.

Insurance can consume a large proportion of a household’s income. Add the amount you spend on covering your home and household contents, jewellery and cars to medical aid and life cover. Disability and income protection for many can be a bridge too far.

There’s no scientific formula for gauging what average households spend on their total insurance bills, but it’s not inconceivable that an average 40-something family can spend as much as 5%-7% of their disposable income on a combination of life, disability and dread-disease cover. The amount committed to protecting themselves from unforeseen risks can often outstrip the contribution they make to long-term investments, cautions Van Deventer.

In the corporate world, workers are likely to be automatically insured as part of the voluminous monthly deductions from their pay packets. Increasingly however, more and more of us are self employed, and for many entrepreneurs, the amount of cover required to protect against “dread events” is so large that many choose not to buy the cover at all. That leaves them and their families vulnerable should they become incapacitated in any way.

Immortality

Buying life cover is fairly easy. Pick a number, pay the appropriate premium and should you shuffle off this mortal coil earlier than you had intended, your nominated beneficiaries will receive the payout you intended for them.

What happens, however, if you do not die?  For decades financial advisers make substantial commissions selling disability and dread-disease insurance on that basis, and according to current FPI Financial Planner of the Year, Warren Ingram, a director at Galileo Capital, they are among the most expensive mainstream personal insurance products money can buy.

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