As a financial planner, I’ve noticed that people often think of employee benefits and personal finance as separate. However, as you’ll see in the examples below, the two are not only related, but are in fact parts of a bigger picture. By taking a step back and looking at how they fit together, we can create a better future for our clients. Allow me to explain.
When we start working with a new family, we commence what we call their “onboarding year”; a thorough journey beginning with trying to determine what kinds of lives they want to live and ending with the final product implementation, cancellation or adjustment recommendation. In-between there is a lot of planning, collaboration and decision making.
In the second step of this comprehensive process, we scrutinise every financial aspect of the client’s life, reviewing “everything with a number on it”, as we say in our practice. Naturally, this includes their employee benefits (if applicable), personal insurances and retirement products.
Reflecting on the many times I’ve gone through this process with clients – most notably those who are 10 to 15 years away from making work optional – I’ve picked up certain patterns in clients’ outlook on employee benefits. With a few impressive exceptions, most clients fit into one of three camps:
1. Don’t know what they’ve got
I think it is fair to say that about half of the new clients I have worked with do not know what cover they have in place, nor understand what the benefits are, what they are for, when they can be claimed, etc. In fact, I am aware of some who never claimed for claimable events purely out of ignorance.
2. Believe they’re good to go
Financial planning naturally includes determining how much life cover, income protection, capital disability cover, etc the client requires to ensure all identified risks are adequately addressed.
There is often a sense of overconfidence – for the lack of a better word – from the client, believing their group risk benefits are more than adequate to meet these needs. However, more often than not, we find this is not the case.
For example, a four times annual salary may sound like a lot of money for a death benefit. But when it takes about R7 000 000 (conservatively) in life cover to provide an income of ± R30 000 p.m. to one’s family upon death (assuming the income must last for 20+ years, is invested targeting CPI+5% p.a. and with a 5% annual drawdown), which must be available after all debts and other immediate obligations are ideally settled, a top-up in cover may be required.
3. Some have more than they need
On the flip side, we also often find that the client is over insured when we consider the cover they have in their personal capacities, as well as their employee benefits. This might be because the client previously had a job with no employee benefits, so they purchased insurance cover of their own. Alternatively, they may have been sold cover they never actually needed, or time has simply moved on and their life circumstances have changed, for example, they are now debt free or the kids are out of the house, meaning they need to provide for less upon passing. Regardless, we see this often and it results in unnecessary monthly spend on superfluous cover.
To avoid any of the above situations, it is important to review the entirety of your financial portfolio. This could be done in collaboration with a licensed financial adviser or on your own, should you have the time and inclination to do so.
To highlight the importance of regular portfolio reviews, as well as understanding what role each product in that portfolio plays, I will provide some actual on-the-job findings from client cases.
Case 1: Jabu*
This client appointed us in 2024. He has financial products in his own name and is a member of a comprehensive employee benefits scheme, consisting of both group risk and a retirement fund.
In the analysis, we found that Jabu was grossly over insured for life cover. He has no dependants or debt but had had the cover for many years, never reviewing the need for it. His group risk death benefit was more than adequate for his needs and it included a continuation option – meaning he could take this cover with him should he leave the employer. Once we highlighted this to the client, he decided to cancel the life cover he had in his personal capacity, which amounted to about R6 000 000.
This simple change saved him R1 210 p.m. (increasing by ± 9% p.a.).
Case 2: Sarah*
When Sarah appointed us a couple of years ago, we saw that her group risk benefit did not provide temporary disability income cover. In other words, it would not have paid an income out for the first 24 months if she could not work due to sickness or disability. This posed a considerable risk because, in the event of a claim, Sarah would have had to self-fund two years’ worth of income. This would have been disastrous for her at the time. We decided to take a temporary income protection policy out in her personal capacity for her to address this risk. The ‘gap’ in her risk plan was now plugged. Crisis averted!
Fast forward to 2024 and Sarah changed jobs. Having now worked with us for a couple of years, she knew to reach out and chat to us as she was aware that every meaningful change or transition in life necessitates a review of one’s finances.
She came to the meeting with her soon-to-be new employer’s group benefits brochure in hand. We were happy to see that the new company offered even more comprehensive benefits as they provided both temporary and permanent income protection cover. This meant Sarah no longer needed the temporary income protection policy we had taken out a couple of years before.
We cancelled that policy, ensuring no duplication in cover and needless spending on a costly form of long-term insurance.
Case 3: Refiloe*
Some years ago, I started working with an individual who was a director of a large firm. She enjoyed very comprehensive corporate benefits and had built up a vast personal financial portfolio.
Upon analysing her finances, I picked up an income protection policy she had taken out years before. Her then-employer did not have any risk benefits in place, so Refiloe needed to provide for herself. She consulted an adviser who kitted her out with the products required, including this income protection policy.
Over the years, the premium for her cover had increased steeply. At the time of our meeting, she was paying ± R3,000 p.m. for the income protection alone. Sadly, she had left that job many years back to join her current employer (which had a comprehensive income benefit in place).
Refiloe was over-insured and had been for over a decade! Had she, or her erstwhile adviser, routinely reviewed her finances, or at least done so when she changed jobs (a major life event), she could have saved herself many tens of thousands of rands in premiums.
Importance of getting it just right
Over-insurance results in an annoying opportunity cost. Let me demonstrate this using Refiloe’s case study as an example:
Let’s assume she had 10 years left until retirement and she used that R3 000 p.m. (increasing by 6% p.a.) premium saving to invest in an aggressive investment fund targeting 12% returns p.a. By retirement, she would have about R880 000 in extra capital.
On the other hand, under-insurance can be dangerous because if there is not sufficient cover when you (or your family) need it most, lifestyles may have to be scaled down drastically – possibly at a time when you’re fighting an illness or when your family is grieving your passing.
Simply put, your financial portfolio is like a puzzle. And the risk and retirement benefits you enjoy through your employer are only pieces of that puzzle. It is essential to zoom out and review the bigger picture, scrutinise it, and determine what pieces might be missing. Yes, over-insurance can be annoying but under-insurance can be devastating.
Do not fall into the trap of thinking you are sufficiently covered and provided for simply because you enjoy employee benefits. Corporate benefits are personal benefits and form part of your own financial planning. Now is as good a time as any to take ownership of this aspect of your life.
*Names have been changed.