Understand these basics before buying life cover

WHEN you take out a life insurance policy, you need to take particular care that you get it right the first time. The trouble with life insurance is that it becomes more expensive as you age, and that, if you put it off until later, there is the possibility you'll have health issues that may even prevent you from being covered at all.

- MARTIN HESSE

Many people are under the mis-conception that life cover is easily replaceable, like short-term cover (the insurance of things) where, if you are not happy with an insurer, you can shop around. They are not aware of how it differs from short-term cover and the pitfalls of treating it in the same way.

Advisers and brokers have a responsibility not only to fully inform their clients about the policies they are signing up for, but to ensure they understand the implications going forward. Unfortunately, too many advisers are primarily interested in making the sale, with the result that too many people are sold policies they don't fully understand, with unhappy outcomes in many instances.

The aim of this and next week's article is to tell you what a competent adviser acting in your interests would tell you when discussing your life cover.

I chatted to Verlyn Troskie, head of retail distribution at Sentio Capital, a boutique asset manager. Although Troskie has more recently focused on investments, he has a long track record as a financial adviser and broker consultant and is an accredited Certified Financial Planner. He has a deep knowledge of the risk-product side of financial services.

Before we examine how life insurance works, there are three basics you need to understand up front about pricing and premiums:

1. If you take out a policy with an escalating cover amount and include an annual premium escalation, the cover may eventually become unaffordable owing to the compounding effect of the escalations.