Is life insurance in South Africa ready for assisted suicide?

In the last month there has been considerable focus on the right of those who are terminally ill to end their own lives. A court recently granted a terminally ill man, Robin Stransham-Ford, the right to end his life. He passed away before he was able to undergo assisted suicide, but the decision by the court has a significant impact on how we view the rights of those who are terminally ill to end their own lives.

This week I was asked about the impact this decision would have on life insurance. Having thought through this, I think that life insurance in South Africa is reasonably well set up enough to handle the impact of assisted suicide. Here’s why:

  • Two year exclusion on suicide

This may surprise most South Africans who work outside of insurance, but most underwritten, individual, life insurance policies in South Africa will pay out for deaths as a result of suicide (assisted or otherwise) if the suicide takes place after the first two years of the policy. So anyone who has had one of these life policies for more than two years will not have their life claim declined by the insurer if they choose to undergo assisted suicide.

  • Terminal illness accelerator

So, what happens if I need to undergo assisted suicide in the first two years of my policy? Most life policies also pay out while the life insured is still alive if they are diagnosed with a terminal illness which, in the opinion of the insurer, will result in the insured’s death within the next 12 months. While not all those who would choose assisted suicide would qualify under this definition, it does provide an option for life insurers to pay out before the insured dies. So where the insured chooses to undergo assisted suicide in the first two years of the policy, the terminal illness accelerator may provide them with an option to still claim on their policy.

  •  The impact of underwriting

 The case that now needs to be considered is where the insured chooses assisted suicide in the first two years of the policy that doesn’t qualify as a terminal illness. We need to remember that lives are medically underwritten upfront which means that they have passed some minimum health standard. This reduces the chance of anyone suffering a condition that results in them choosing assisted suicide in the first two years of the policy.

Practically though, I would think the insurer would make some sort of concession if a policyholder underwent assisted suicide in the first two years of a policy as a result of a legitimate health condition. It might be as simple as reducing the benefit pay-out by the premiums that would be owed from the date of death until the second policy anniversary of the policy.

  • Conclusion

I would assume that the above points mean that underwritten life policies are (more or less) set up to allow for assisted suicide. I wouldn’t be surprised to see some insurers introducing policy wording clarity around assisted suicide in the future though.

  • Other concerns

Life cover outside of the individual, underwritten space may have different terms regarding suicide.

Some countries who are grappling with the assisted suicide issue are also considering whether they would allow assisted suicide for those who have purely psychological issues. If they were allowed, I am not sure how insurers would view an assisted suicide as a result of a psychological condition.

 

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Life cover – Term or whole of life?

I recently read an article that gave the reader ten must follow financial tips. While most of the tips were not that outrageous, the writer did advise the reader to always take term cover instead of whole of life (WOL) cover. This proved to be a fairly controversial point and most of the comments argued either that WOL was always better than term cover, or vice versa.

So, you may be wondering what the difference between term cover and WOL is. Let’s do a quick recap:

Term Life cover only covers you for a set number of years, after which the policy ceases and you no longer have cover. If you die before the end of the term, your beneficiaries are paid out a lump sum. If you die after the end of the term, no payment is made because cover has ceased.

WOL cover has no term. The policy remains in force for the rest of your life. On your death, whenever that may be, the policy will pay out to your beneficiaries.

WOL will cost more than term cover, because it offers you cover for the rest of your life.

Why did the writer of the article advise you to always choose term cover over WOL? He argued that you should take the lower premium offered by the term life cover, and invest the difference between the term premiums and the WOL premiums. Once your term life cover ceases you now have no more life cover, but you do have an investment from all the savings you have made.

While this is an option, there are several issues I have with advising people to always choose fixed term over WOL. These are:

  • The savings might not be big enough to justify choosing term life cover

Let’s take an example of a 40 year old man who wants R10 million in life cover. His premiums for WOL cover would be R2320 per month. His premiums for term cover to age 65 would be R1950 per month. So by taking term cover he would save R370 per month.

If he was to invest the savings for the next 25 years and earn a return of 10% after tax, charges and commission, he would have a portfolio of R582,665 at age 65. However, if he was to take the WOL option, he would still have life cover in force of R19.2 million at age 65. Which is worth more, the life cover or the investment? That depends on your personal circumstances and attitude to risk, but it is impossible to declare that one is definitely better than the other (as the writer has done). Remember that the savings you make by taking term cover instead of WOL are unique to your personal circumstances, so you would need to tailor the calculations to your own  situation.

Secondly, this is all well in good in a simple example, but not all of us are disciplined to invest those savings every month.

  • The argument ignores your needs

Any good adviser is going to quote you benefits that match your needs. A lot of your life cover needs are best met by term cover, like paying off a mortgage. However, some life cover needs are best met by WOL cover. If you are using life cover to settle estate duties or meet the cost of your funeral, those needs are for your whole life, and so your benefits should also be.

  • Your retirement date is unknown

I always like to think of life cover as the present value of the income I was going to earn for the rest of my life. As such, if you choose term cover, you should pick a term until the day you intend on retiring. Once you’ve retired, you would no longer be earning an income from working, so you have no need for life cover (or so the theory goes).

The problem with this is that it is incredibly difficult to know when you will retire. A lot of people are working to older ages because they can’t afford to retire yet. Choosing term cover with a fixed term places you at risk that you need to work beyond that age and, as such, would need life cover.

  • Continuation options aren’t all they’re cracked up to be

“But what about continuation options built into term life cover?” some may ask. Yes, continuation options do allow you to continue your life cover when you reach the end of the term, but they have two significant problems:

  • Your cover at conversion will be priced for you at that age. This means that your premiums after continuation will probably be significantly higher than your WOL premiums at this stage.
  • These options often require you to go for medical underwriting, which means they will check how healthy you are at continuation. While most policies mention that you have to undergo “minimal underwriting” at continuation, they fail to set out what tests they will and will not perform. This means that you have very little guarantee in terms of avoiding underwriting. It is also worth noting that you will be quite old at continuation date, and at older ages medical underwriting is a very big risk to you obtaining insurance cover, because of the high likelihood of you having a medical condition. Medical underwriting can quite easily result in your premiums being even higher, or cover being declined. Any form of medical underwriting at conversion stage makes the conversion option worthless in my eyes.

Conclusion

So, am I going to tell you that WOL cover is always a better option than term cover? Most definitely not. The most important thing is to understand the difference between WOL and term cover and decide on which is the best match for your needs. Remember that the best solution may be a combination of WOL and term cover (For example R5 million term cover and R5 million WOL cover).