Author: Jason Appel

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Factors to consider before cancelling your life cover

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.

Podcast

Kim Potgieter and Jason Appel explore the factors you need to take into consideration before making decisions regarding your life insurance policies.

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Six tips about drawdowns during the COVID-19 crisis

Drawdowns have positive and negative implications for our long-term financial planning. Although ideally, withdrawals should be around 4% to weather any storm, your optimal withdrawal is dependent on multiple factors such as your age, investment strategy and individual cash flow needs. In a time where we feel more helpless and unable to control the outcomes, it is worthwhile looking at some proactive ways we can protect ourselves in volatile times when it comes to drawing down from investment portfolios.

1) Try delay unnecessary withdrawals.
Try not to withdraw funds out of your portfolio unnecessarily. This will happen naturally to an extent as we are not allowed to travel and are staying home. Consider delaying the purchase of vehicles and postponing overseas travel to 2021.

2) Cut back on monthly expenses over lockdown.
Cutting back could allow you to stop or lower your withdrawals from your liquid assets, even if just temporarily while on lockdown. By reducing your drawdown, you reduce the losses realised as the impact of sequencing risk. Your drawdown on liquid investments can be amended at any time so when lockdown measures lighten, and your budget needs to be adjusted, you can readjust your withdrawals where needed.

3) If you are unable to reduce costs, try ways to budget around keeping your withdrawals unchanged.
Do this in consultation with your Retiremeant™ Specialist. They would have already structured your income as efficiently as possible at your last income review. There may be some short-term scope to reduce your risk and the impact of negative compounding. By simply not increasing your drawdown from last year, you can reduce the impact on your portfolios considerably.

4) Amending your Living Annuity drawdown if your anniversary is still months away?
With Living Annuities, you are usually locked into your income until the anniversary of the contract. However, National Treasury has just released COVID-19 tax relief measures on the 23rd of April 2020 that state the following:

“Individuals who receive funds from a living annuity will temporarily be allowed to immediately either increase (up to a maximum of 20 per cent from 17.5 per cent) or decrease (down to a minimum of 0.5 per cent from 2.5 per cent) the proportion they receive as annuity income, instead of waiting up to one year until their next contract “anniversary date”. This will assist individuals who either need cash flow immediately or who do not want to be forced to sell after their investments have underperformed.”

This means that should you be receiving surplus income from a Living Annuity, you are able to apply to reduce your Living Annuity incomes (down to a minimum of 0.5%). Any changes must be done in consultation with your Retiremeant™ Specialist as they have likely already structured your incomes optimally for various reason specific to your individual planning.

In cases where you are under severe cash flow strain you can also increase your Living Annuity drawdown (limited to a max of 20%), but this should be last resort where possible as SARS will still charge PAYE income tax on the incomes and higher drawdown in the current economic environment should be avoided as much as possible

5) Be mindful of your liquidity position.
It may be more advisable to maintain your current drawdown on a Living Annuity to create additional liquid funds if your Retiremeant™ Specialist identifies this as something to be cautious of in your planning. In Retiremeant™ Planning, Liquidity is still king, and should not be sacrificed for short -term reasons.

6) Don’t be tempted to reduce your Living Annuity payment to reduce tax.
It will result in having to increase your withdrawals on other assets which could negatively impact your Liquidity, as well as increase the sequencing risk on those investments. Instead, review your income planning with your Retiremeant™ Specialist. They can ensure that your income is structured as tax-efficiently as possible while catering for your long- term liquidity needs.

Now more than ever, it is vital to have a robust and flexible financial plan. This involves adjusting your planning to react to an ever-changing world. We will all likely come out of this lockdown with a greater sense of awareness of what is important to us, which will give even more meaning to our money.

Podcast

Drawdowns have positive and negative implications for our long-term financial planning. Jason Appel shares some insight on how to realistically assess the impact this crisis has had on your financial plan by diving deeper in the concept of portfolio drawdowns, as well as steps that can be taken to reduce the impact of drawdowns.

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Online Security Tips

Lockdown has brought with it a learning curve where we have all had to leave our comfort zone and become more tech-savvy, embracing new technologies and ways of communicating. Unfortunately, this new digital world doesn’t come without its risks, and we need to develop good security habits when using technology.

Be aware of phishing scams
Phishing is the fraudulent attempt to obtain sensitive information such as usernames, passwords and credit card details by disguising oneself as a trustworthy entity in an electronic communication. The best way to protect against phishing scams is through scrutinising your emails: who is the mail from, do you know them, and were you expecting it? Take note of tone and formatting as this can raise alarm bells, even if it from a familiar email address. Often, phishing scams are associated with emails where there is a false sense of urgency, i.e. requesting you to confirm details to avoid your account being blocked. Also, check if there are any links to webpages or attachments in the email. Only open the email and its attachments when you are confident it is legitimate.

Ensure your software on your devices is always up to date
The world of online security is constantly changing. Most smartphones and computers prompt auto-updates which you can accept, and this usually links you to the correct place for the update. A link sent via an email or through Whatsapp to update your app is quite likely to be a security threat, so only use the official channels for updates.

Upgrade your passwords
We are all tempted to use one password across all our devices; however, they can usually be easily hacked. When choosing passwords, take the following into consideration:

  • Never re-use passwords. Where possible, you should have a unique password for every online account.
  • Try using passphrases as your password; these are similar to passwords but generally longer for added security. For example, if you are choosing a Facebook password instead of using your name and a popular number rather use a crazy passphrase like- Don’t spy on me Mark Zuckerberg! Or with Apple Music, try a line from your favourite song, for example, Lucy In The Sky With Diamonds.
  • Use special characters and upper- and lower-case letters in your password or passphrase – D0n’t$pyOnMeM@rkZuckerberg!
  • Log out of applications, and don’t opt for your browser to remember your passwords. While most mobile devices have fingerprint access and most devices offer the option to remember your passwords, the safest option, which may be as old as time, is to write down your passwords and store them in a safe space.
  • Activate Two-Factor Authentication. This is when you provide an email address and cell phone number when signing up for an online profile. Whenever a new login from another device is triggered, it sends either an OTP or some form of a link to your cell phone via SMS or an email to notify you of the login attempt and to authorise access. This has become standard practice on most social networking and other online platforms.

Never share sensitive personal information over emails such as online banking profile details or other login information
It’s a general rule that banks and providers will never ask you for login information via an email or attach a link for you to click on to log in to your profile.

Zoom Calls and other online meeting applications
Now that we are meeting online and attending Webinars at Chartered, we also need to stay safe in these environments. Unfortunately, due to the increase in use, Zoom has become susceptible to cyber criminals. If you are going to set up your own zoom calls, then we suggest you make your meeting password protected. Chartered will be using Microsoft Teams for formal reviews or discussions that need confidentiality as it has proven to be more secure. Rest assured Chartered does take every precaution when hosting Webinars on Zoom, so please do join us.

We encourage you to keep security top of mind and remain aware of potential security threats. Should you ever have a concern around a communication you received from an Investment provider or directly from Chartered, please contact someone in your RetiremeantTM planning team, and they will gladly clarify things for you.

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