| Self-insurance – does it work? Everyone, including me, hates the grudge purchases. The medical aid when you’re never sick and probably cross-subsidizing old folks and hypochondriacs. Short term insurance on house, car, contents, valuables when you never claim. Life insurance that goes up in double digits but with minimal benefit increases and your kids are grown. The short answer is that if you do the math and have sufficient savings self-insurance could very well be enough. It’s easy to do the math – just work out the financial impact of an ‘event’. It’s important to look at these holistically too and understand the difference between a want and a need. Let’s put it this way, you’re in your 50s, the kids are educated and ready to leave the nest (yes, they often overstay their welcome and parasitise on their parents as long as possible, but that is a topic for another day) why do you still need life insurance?. You might ‘want’ to leave your kids a legacy in a life policy on your death, but you haven’t saved up enough for your retirement. That need should outweigh your ‘wants’. This post is also available as a podcast – you can also search for Rexsolom Invest on your favourite podcast channel  Cover the needs first, then you can start looking after the wants. The next variable to look at is the probability of an event. For example, a house burning down is probably a once in 10 lifetimes event, the probability of dying is 100%, the probability of getting a dread disease is about 25% – but the financial impact of that if you have medical aid is not as big as you think it is. The one way to soften the blow of a grudge purchase is to know that you have the right cover, and that the playing field is level – sometimes you win, sometimes the insurer. Find an advisor who will do a properly quantified needs analysis with you (before asking you what your budget is!)  Typical needs are: Leaving minor children without the financial means to get them to adulthood and on their feet. It’s fairly easy to calculate what you need here – for everything use the PRESENT VALUE, don’t try and second guess inflation and market returns (your planner can get into those nuances if it is needed). This is also a declining value – every year that goes by is one less year that you have to potentially prepare for. Leaving a spouse, especially 10 years out from retirement, with insufficient to retire on. From age 50 onwards are the accumulation years, when most of your obligations are paid off and children out the house so you can seriously save toward a retirement. Removing one spouse from the equation here could have a huge impact on their retirement plans (especially if they have been an unpaid worker in the home and not out in the marketplace). Once your retirement pot is full, you have no need for this ‘life’ insurance. Life cover does not need to be ‘for life’ and at some point it moves from a need to a want. If the need is no longer there, and you can afford it, a simple bit of math will tell you whether it is a good ‘investment’ for your legacy to keep paying those premiums. Pity you’ll never enjoy it. Your house burning down, whether or not there is a mortgage (lenders will unusually insist on house cover). This a relatively rare occurrence, and insurance is relatively low for this but usually includes much more frequent events like geysers bursting. Even if you have several million saved up – that is probably earmarked for retirement. Do the math. How many years of premium would you have to pay in insurance to make it more than the value of the house? Decades? Centuries? Portable and luxury items are often the next consideration – cell phones, laptops, watches, rings. They are the most likely to get stolen. General household contents? That is a need that is pretty far down the list – and cover in the event of fire, flood or other destruction rather than theft might be an option. Medical aid – this is probably the first place to make sure your cover matches your needs – after mortgage and car, this is often the third biggest budget item for a household. To add insult to injury medical aid inflation is usually double CPI, and benefits are constantly eroded. Ask your med aid broker to do a comparison between your current and some of the lower plans. Downgrading your plan works best with Gap cover. Of course it is possible to ‘self-insure’ for these events, it’s just how big the pool should be. Conservatively, I would say circa R1m (55 years of premium for a basic med aid that only covers hospital stays). BTW, “Hospital plans” are not medical aid, they are a short-term product (as gap cover is) that pays out a fixed sum for various events. All medical aids (governed by the medical aid act, with different underwriting rules than short term) have hospital cover at their core – savings is usually added next, and then, in the costlier plans they will add doctors, visits, dental care, physio etc – most of these will be capped. If you’re happy using government hospital facilities of course then this is a moot point (but perhaps funeral cover would be an option). Income protection. This is considered part of ‘life cover’ and is commonly found in corporate and government group benefits and in my opinion one of the most important insurances to have. The long term financial impact of surviving an event but being left unable to work for decades into the future is huge. Unless you’re covered by group benefits, this cover ranks very close after life cover and medical aid. Dread disease cover. To be perfectly frank. If you have medical aid, this is more of a want than a need, and when you’re on a budget, the last type of insurance you should look at – along with house contents. Your financial advisor should be able to prioritise your needs when it comes to the best way to cover your risks and future needs – but to stay inside your budget. It’s probably going to be a journey, and some policies actually have the ability to build in the increases (in the life cover, dread disease and income protection areas) without having to go through underwriting all over again. Spare cash should be invested, not put into bumping up premiums so the broker gets a fatter commission.  Credit card as an emergency fund? Used prudently, your credit card can be your emergency savings or for self-insurance. Credit card interest rates, as we all know – are always high, often nearly double what you’d pay on your mortgage. (Ironically, in the USA over the 15 pre-pandemic years when mortgage rates were around 3-4%, their credit card interest rates were up at 18%, nearer ours!) My advice is to use your credit card but don’t let it use you (in other words using the 55 day interest free period, with instant access to a lumpsum if you need it. If you keep the credit card maxed out with a minimum payment – rinse, repeat – it’s using you). It makes the most financial sense to pay off the most expensive debt first – and credit cards are going to be right up there. Do you know your spending behaviour, weak points and what works for you? Here are some tips and tricks to pay off a credit card (short of just cutting it up). Take the card out of your wallet and put it in the safe – if you need to remove the temptation even further, you could wrap it in plastic and deep freeze it. (Never leave them lying around – if you don’t have a safe invest in an inexpensive book safe from an online store – and mix it in with all your other books on a bookshelf). Remove the credit card ( or virtual card it is linked to) from your online stores switch it out for a cheap debit card for your day-to-day and online expenses. I use an online bank with low fees but a good savings pocket interest for my day-to-day stuff and emergency fund – don’t use your main account that your funds go into monthly and, your debit orders run off, and may have your proper savings, a mortgage linked to and an overdraft facility. If your account gets hacked, you don’t want them anywhere near your real money. If a bad actor gets into your main bank account, they can clean out not just your savings but use up all your overdraft and all the equity in your ‘flexible bond’. I have had clients lose millions in minutes. While I’m on safety roll here, another tip – download ALL the banking apps you can find in your play store – only you are going to know which one is real, buying you time if your phone is stolen to shut down access. As your credit card balance drops (paying the minimum and not using it) you can do an online ‘credit switch’ into the ‘budget’ portion – again putting it out of sight, but it’s still there if you suddenly need it.  Savings pot raids What about dipping into your savings pot of your pension to pay down debt and build up your slush fund? I know I’m probably shouting into a void here, and anyone tempted to raid this pot has already done so – but before you’re tempted to go this route in the future (because you can raid it once a year), please do the math (I have written a long blog on this that you can read HERE). You only need to be earning over R58k a month to be on a 39% marginal tax rate in South Africa – that’s almost as eina as those ‘payday loans’ that were so popular a decade ago. Simple math will show you that taking out R30k (now R18k after SARS takes his slice) to put into a bond where the interest rate you’re being charged is ‘only’ 11.75% makes no sense. I’m sorry to go off on a rant here, but the only winners in this 2-pot bonanza are SARS – R5bn and counting.  I’ve said it before, but it bears repeating. Start building a relationship with a financial advisor early in your career – your parent’s advisor may be a good place to start – although you might be considered ‘too small’ a client for them normally, they will want to keep in your parent’s good graces. Keep learning about the industry, markets, economics and investment so that you can ask the right questions. Find podcasts, blogs creators that help build your understanding. Many (like myself) have free newsletters and subscriptions to make it easier. Articles and Blogs: Wealth traps waiting for unsuspecting entrepreneurs NEW Two Pot pension system demystified Keeping your legacy shining bright Financial well-being when dealing with Dementia and Alzheimers 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 |