| THE PODCAST RELATED TO THIS BLOG IS AVAILABLE HERE One of the so-called sensible decisions most of us make when we start a family or buy a house is to take out ‘Life cover’. I know this is a grudge purchase – but think of it like this – it’s one way of ensuring that your legacy and reputation remains bright after you’re gone. Unless you’re a complete sociopath, nobody wants to leave children destitute and your funeral to turn into a go-fund-me event. Mitigating risk is probably one of the most important considerations when you’re managing your wealth portfolio. It is usually top of mind for us wealth managers – we choose a blend of assets that have a risk profile which is appropriate for your specific circumstances – including your personal risk aversion. You’ll find risk mitigation everywhere once you start looking for it. In nature the fight or flight response is built into our DNA so that we can identify bodily risk, often before we can put a name to it. Birds go to great lengths to migrate to warmer climes to avoid harsh winters that could kill them, or their offspring. Animals build ‘homes’ to protect themselves from the weather or prey. Trees cover their seeds in hard protective coverings so they aren’t part of nature’s quick treat – and their ‘offspring’ can also see the light of day.  Life assurance is the ‘unsexy’ side of the wealth advisory business, thanks in the main, to brokers who over the decades have flogged the policies with little consideration to anything other than the commission they receive. This is a huge shame. Once you’ve been around the industry long enough, you begin to see the impact that cash from such policies can have on individuals (dread disease, income protection and disability) and families (life cover). (Yes, so-called ‘life’ cover incorporates all these events, and they must be insured for separately.) I have seen firsthand how quick payouts from life policies have been able to pay for funerals, keep the lights on, pay school fees etc long before other assets are wound up in an estate and liquidated. So how do you work out what you ‘need’? Remember it may not be the same as what you ‘want’ (or what the broker thinks you want). This ‘needs analysis’ forms the basis of your financial plan and is a requirement in terms of the FAIS act. Unfortunately, many brokers, especially for call-centre life companies, will pay lip service to this requirement – and are highly unlikely to follow up annually to find out whether these needs have changed. So, how do you build your own needs analysis to check what you’re getting is appropriate? If you haven’t already done so yet, get your affairs in order. (I have a RedFile organisational system which is free on request that can help you with this). Part of getting your affairs in order is doing a personal ‘income statement’ (aka budget) and balance sheet (assets v liabilities).  Next, ask yourself what the long- and short-term impact would be on your premature death. This is what life cover/ life assurance is for. It’s the equivalent of a farmer insuring his orchard or herd of cattle. You will first need to work out the “Present Value” of the amount needed – which is where your advisor can help, if not here is the equation: PV = FV/(1 + i) n where PV = present value, FV = future value, i = decimalized interest rate, and n = number of periods. I’m not showing off, perhaps just making a point. It isn’t a simple concept, and before you just plug in numbers into a webpage or excel sheet, please at least understand the basics of how the number was derived. |
 There are some obvious things to take into consideration: Education and shelter of children until they are on their own two feet Provision for your spouse, especially if they have scaled back their career so that you can pursue yours. That spouse probably hasn’t been providing for her retirement either – and the retirement funds are usually one of the biggest pots of investment that anyone will accumulate over their life time. (You could argue that a home is a close second, but all a paid-off home does is pre-pay your rent in retirement). Paying off all debt – mortgages of course, but all debt including personal loans, mortgages, if you’re married…then both parties. If you’ve ever signed surety for someone, especially as a director in a company, then you may need to include this. (Banks have been known to go after a deceased estate for a full loan to a company – irrespective of the number of directors – it’s in the small print). One important thing to note is that many of these debts decrease over time – so it may not need to default to CPI escalation over time. It doesn’t make sense to waste money on life assurance – and you can probably save a lot of money by ring fencing your needs and assuring them separately. With the right assurer you could build in a fail-safe to increase the cover without ‘medical underwriting’. It’s an unpopular fact that as we get older, the greater the chances of ‘life’ happening that makes us either uninsurable, or dramatically increases our premiums. Pre-diabetes – a popular catch-all diagnosis for anyone that is overweight – can render you uninsurable!  One question I get a lot – is why don’t I get anything back? Why isn’t there an ‘outbonus’ for example. This sort of life cover used to be very popular in the last century, and some (call-centre) life companies have resurrected it in the last decade (with limited success). Bottom line, the cost of the ‘investment portion’ is built into the premium and simple math will show you that you would save as much, if not more, by saving that portion yourself – and be guaranteed to get it. These ‘cash-back’ policies fall away on your death or should you claim. One last tip. If you’re taking out life cover, never self-diagnose a condition or have a pity-party on the application form! Once that application is submitted, it will forever be on your record, and could prevent you getting the cover you need in the future.  What if you have now got to the stage where all your liabilities are done, your pension pot is full, kids are grown and out of the house – what should you do with the life policy that you’ve been paying into for decades? You could look at it as an investment – a legacy. Get your advisor to do some projections for you – how long would you have to continue to pay premiums (increasing at whatever level you nominated) for you to accumulate the lumpsum life payout? I have found instances where someone would have to live to well over 100 years to have ‘saved and invested’ the equivalent amount. (There are some caveats and nuances here when it comes to the ‘premium pattern’ used, but your Planner should be able to do the math – or change the premium pattern going forward without underwriting). As much as ‘life assurance’ is an unpopular side to the wealth management business – you cannot ignore it. In my experience there is a natural continuum to building your wealth portfolio. First you protect yourself from risk (medical aid, emergency fund, personal disability). Then you take care of your responsibilities and liabilities (life cover). Once you’ve ticked those boxes then you can start investing, starting with your retirement ‘needs’ before moving onto the ‘wants’ (The amount you need to retire at age 65 replacing your current income (adjusted for inflation of course) is quite different from wanting to retire at age 55 with significantly more). After that comes the nice to haves – gap cover, dread disease cover, offshore portfolio etc. DISCLAIMER: The information provided on this platform is for general informational purposes only and does not constitute financial advice. While we strive to provide accurate and up-to-date information, it may not be suitable for your specific financial situation or objectives. You should not rely on the information presented as a substitute for professional financial advice. We recommend consulting with a qualified financial advisor or conducting your own research before making any financial decisions. We do not guarantee the accuracy, completeness, or timeliness of the information, and we are not liable for any financial losses or damages resulting from actions based on the content provided here. Use the information at your own risk, and always exercise due diligence when making financial decisions. Articles and Blogs: Financial well-being when dealing with Dementia and Alzheimers NEW Weathering the storm Pruning your wealth farm Should you change your investments with changing politics? Taking a holistic view of your wealth Why do I need a financial advisor? Costs Fees and Commissions The NHI and what to do about it New-Normal for Retirement? Locking-In Interest rates – The inflation story Situs – The Myths and Reality Tax Residency – New Rules new headaches Are retirement annuities dead A new look at retirement Offshore investing – an unpopular opinion Cobie Legrange and Dawn Ridler, Rexsolom Invest, Licensed FSP 45521. Email: cobie@rexsolom.co.za, dawn@rexsolom.co.za Website: rexsolom.co.za, wealthecology.co.za |