In a year that has seen markets fall and returns on investments fall to low single digits, retrenchments on the increase and cost of living on the increase; it may seem like a good idea to some to cut back on insurance policies. Like a lot of ideas at the time it may seem like a good idea until an event occurs that proves the contrary.
Insurance products can be broken into two categories, one being risk and the other being investments. On the risk side, the name itself should serve as a warning on the actions you take, if you cut back on insurance such as life cover, car and household cover and income protection, you expose yourself to risk. You need to look at the motive as to why you intend to cut back your insurance. The motivation is usually money that needs to be saved. However, you need to consider the risk of not having those items or lives insured.
Car and Household cover considerations
On the vehicle and household contents, you may be able to cut the cover on non-essential items such as house content, but if your vehicle is critical in the role of generating that income which provides for your needs, it would not be advisable to cut that particular corner. You may if need be go for a higher excess to minimize the premium paid for the cover for the vehicle till you get back on your feet.
Life cover considerations
The same principal can be applied to life cover; you need to consider that the most important tool you may have at your disposal to generate income is actually yourself. You need to bear in mind that when you took out the life policy, your health may have been better and situation also may have been different. The reason I mention this is that the policy was underwritten and based upon those circumstances then.
If you stop the policy and your circumstances are now worse in terms of health etc., you may get a higher premium going forward or worse not get any cover at all. When we talk about life cover, you need to look at the disability cover and dread disease cover as well.
Disability cover considerations
Disability cover can be in the form of a lump sum or income protection. Income protection is basically insurance on your earnings, that starts to pay out when you are unable to work for a period or permanently. It only kicks in after an agreed period has passed and you meet the insurers requirements, which is usually 3 months. To work out what you need, I would suggest sitting with a financial advisor and your budget.
You may be able to reduce the cover to save premium if you are over insured. A factor to consider is that you can’t be insured for more than you earn. And that cover is across all your portfolio including the company provident/pension fund that a lot of people forget about. While your situation might be tight and you may need to cut back, if an unforeseen incident puts you off your feet for a long period of time, the situation would get worse.
On the investment side, cutting back here is maybe less risky to the short term but will have an impact on the long term. The one event of financial planning which has the biggest probability of happening is retirement. Death and disability are events that can occur but are statistically less likely. If you do decide to cut back on your contributions to an RA (Retirement Annuity), look at the penalties that may occur and be aware of them.
RAs have penalties if you reduce the premiums, while unit trust don’t.
Your advisor should be able to advise you which one you have. Something else to consider is that you cannot access the funds from an RA until the age of 55. When you reach 55, you will be able to access 1/3 of your RA tax free, up to an amount of R500K, but any larger amount would be taxed. Similarly Preservation pension / provident funds can be accessed once before the age of 55, but will also be taxed according to the SARS Withdrawal tax table, beyond an amount R25K.
Clients invested in Living annuities (Retirees) will only be able to access the capital via an income, which can can be changed annually to be between 2.5% and 17.5% per annum.
The advantages of Unit Trusts
Unit trusts are the best investments in terms of savings vehicles as you can access them at any stage and make great savings vehicles for hard times. There is no penalty and you can or withdraw at any stage. You can also stop payment or reduce these payments till you get back on your feet.
In the current climate, just bear in mind that withdrawing from your investments when the markets are down, you will be locking in the loss if any.
Trying to plan your finances in hard times needs to be done properly and all factors must be taken into account. Everyone’s circumstances may differ and it’s for that reason that before you make those cuts, I would suggest having a chat to your financial planner. If you don’t have one, a bank or any of the normal financial institutions can provide one. Most financial planners don’t charge for their time, but when making an appointment confirm this. No General sends his troops to War without getting a lay of the land, and so I would suggest the same before making decisions that will have an effect on you and your loved ones, get a lay of your “land” that being your portfolio.