INL

Be prepared: Funerals are expensive, so a cost-covering policy is crucial.

Many readers write to me about their wish to get a wealth programme going but say they cannot start this until their debt is taken care of.

They also say they have not provided sufficiently for their family after death and need to know how to do so. Let us then look at how we can make provision for our families after death.

In a nutshell, first we should aim not to leave the family with any new debts that are incurred as a result of death; second, provide some cash upon death to repay the current debts; and, finally, leave some money to provide an income for the family after we’re gone.

Because many budgets are already constrained, it is best to take care of these needs in sequence, starting with a funeral plan (the least expensive from below R100 a month), then a low-cover life plan that takes care of the small debts of up to R200 000 (costs between R100 and R200 per month), after which you could buy life cover that would replace your income with cash after death.

A financial adviser may be needed for this; one could apply a formula that would calculate the value of 20 times your net annual income to determine the amount required.

The total for all three needs may be too expensive in one go, so start with the lowest monetary value need (the funeral plan) and each year, or as your budget permits, progress to the next levels.

I interviewed Russell Attwell from Phakama Funeral Administrators, who manages more than a million funeral and life policies for well-known SA insurers, trade unions and soccer clubs, women’s leagues and individuals.

From the interview I concluded that many South Africans want funeral policies but do not know how to get one other than attaching it to an expensive life policy; or talking to a call centre agent who invariably tries to oversell.

Russell says: “Too many people buy the cheapest cover, which may not be sustainable in the long run, so the premiums go up. Policyholders become disillusioned and often cancel the policies, or simply stop paying premiums.”

Funeral policies have a six-month exclusion for death from natural causes (imposed on each new fund that you change to) and many people will remain with a previously cheap and now expensive funeral policy rather than change. Russell suggests that you buy the cover you can afford now, which can be increased later when affordability allows, and select a recognisable and solid underwriter.

Funeral cover (defined by law as less than R18 000) should be inexpensive and easy to acquire.

You should also have the option to add your extended family onto the plan. You may, for example, add a parent, and still pay less than R100 a month.

These plans may appear more expensive than normal life insurance. This is because they require no medicals tests and questionnaires. It is worth noting that funeral policies may impose a waiting period in respect of a claim due to death of natural causes.

However, this is not applicable to accidental death. Funeral policies should assist the family in the time of need, at the time of the funeral and not some time in the future after the estate has been finalised.

The next thing you need to take care of are debts with no or low underlying value like personal loans, clothing accounts, credit card debts, overdrafts and cell contracts (under R200 000 in total in most instances).

Then you need to take care of car and bond debts before getting to replacement of income with cash through life cover.

I often advise clients who do not yet own a home to provide some extra cover and increase the life cover by the value of a property they are aiming to buy when they can. In the case of couples, it is best to include both parties, as both incomes are used to sustain the family.

l Deon Hattingh is a certified financial planner and trainer. For more information, please visit www.makingSENSE, or e-mail deon@makingsense.co.za