Covid-19 has forced us all into a state of uncertainty and a time of adaptation and reflection. Due to the significant economic impact, clients have been looking for ways to tighten the belt while they weather the storm. An interesting conundrum arises when it comes to life insurance, especially when you are retired and are no longer earning an income to fund the premiums. Does one continue to take money out of investments to fund life insurance premiums? Unfortunately, there is no black and white answer, but there are some factors to take into consideration.
The size of the premium relative to life cover benefit – Often with life insurance, the cover amount does not escalate at the same rate as the premium. There are cases where the premium has escalated to thousands of Rands, but the life cover value has not kept up with inflation. In these cases, the benefit has become expensive relative to the cost. However, the opposite can also be true.
Outstanding Liabilities – If you owe an amount on vehicle finance or a home loan when you retire, it is crucial to ensure that your estate can bear the costs of settling this debt, without negatively impacting your surviving dependents. It is also important to note that if a life policy was ceded to the bank to cover a mortgage, then this cession will need to be removed by the bank before any changes can be made to the policy.
Costs payable by your estate on death – Unfortunately, dying is not a cheap process. When you die, your estate becomes liable for numerous unforeseen costs (estate duty, outstanding income tax, capital gains tax on all your assets, executor fees, master’s fees, funeral costs). If you do not have sufficient cash or liquid investments in your estate, then assets may need to be sold to cover these costs.
The strength of your RetiremeantTM Plan – In very general terms, if you can afford to retire comfortably, then you likely don’t need additional life cover to pay out to your spouse. However, if there are concerns around the longevity of your planning, it may be feasible to keep life cover running (if the premium is affordable enough to do so). In some cases, premiums are just too high, and the impact of keeping the policy running does not create sufficient benefit for the surviving spouse. Because death is certain, but the timing is uncertain, it can be tricky to make this call.
Does your life policy have a surrender value? – Some policies may have a cash component available to you on cancellation. It is essential to measure this cash value relative to the life cover amount and premium before deciding to cancel. Suppose your policy does not have cash/surrender value. In that case, you need to be mentally prepared to stop a policy that you have contributed to for years and get no tangible benefit from (apart from a monthly reduction in spending).
Your life insurance can be converted to an “investment” for your children – This may seem unconventional, but if you struggle with the idea of cancelling a policy you have contributed to for the past decade or more, then why not crunch the numbers with your RetiremeantTM Specialist. If your children take over the premiums on the policy and are appointed as the beneficiaries, this can, in some cases, result in a good investment for them. This will, however, depend on the size of the premium, the value of the life cover, as well as your life expectancy and health.
Are there any other benefits on the policy? – Check if there are any dread disease or disability benefits on the policy before cancelling anything. These additional benefits may be needed depending on your personal circumstances. In some cases, it is possible to alter a policy instead of cancelling it altogether.
These are just a few considerations, and the decisions around any financial product should always be made within the greater context of your financial plan and in consultation with your RetiremeantTM Specialist. Please get in touch with your RetiremeantTM Specialist if you need any assistance in this regard.
Kim Potgieter and Jason Appel explore the factors you need to take into consideration before making decisions regarding your life insurance policies.