Life cover – is it part of your financial plan?
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By Palesa Tlholoe
The concept of insuring one’s life is still frowned on by some South Africans, who think of it as throwing good money away. Yet those same people are happy to pay car insurance! Maybe it’s an indication of our materialistic nature, or simply a lack of understanding. The truth is that life insurance is a critical part of a sound financial plan, designed to protect your family’s future in case the worst happens. Here are some reasons why.
It protects your income and assets
There’s a popular misconception that your house and car are your biggest assets. Wrong! Your biggest asset is your ability to earn an income. If you have adequate cover on your life, the car and house you bought on credit will be paid off if you die. Your family will also receive a monthly amount or a lump sum, allowing them to maintain the lifestyle that they are accustomed to.
Death is not the only thing to worry about. It can be equally devastating if you are suddenly unable to work due to illness or disability. You might be lucky to earn disability income from your employer, but this might only be 75% or less of your normal salary. With life cover that includes income or lump-sum disability insurance, you’re essentially protecting your pre-disability income, which means you and your family can continue to live as you did before the illness or accident.
It keeps your business going
Starting a business is one of the main wealth-creation strategies, but it’s not easy: about 70% of start-ups fail within the first three to five years. If you do not manage to nurture your business through that bumpy first stage, life insurance becomes an accessible tool to create and transfer wealth to the next generation.
There are other important insurance products to consider. A business partner who dies or becomes disabled can affect the cash flow and the value of the business; likewise, creditors can panic and recall their funds. In either of these cases, a contingent liability policy will pay the debts of the business; keyman insurance will assist the business to fund a replacement partner; and a buy-and-sell policy will help the remaining partners buy the shares of the deceased at a fair value. The business can continue with minimal financial impact, and even if your descendants won’t be involved with the business going forward, they’ll be secure thanks to your life cover.
It helps wind up your estate
Estate duty, capital gains tax, transfer duty, executor's fees: these are just some of the costs levied at death. When you pass away, your estate gets frozen and winding it up can take months or even years. During this time, your family will have no access to the funds in the estate.
Your life cover policy, however, is immediately accessible and will either pay directly to the beneficiaries or into the estate bank account to take care of outstanding costs and help avoid delays.
You need life cover! But calculating how much depends on a variety of factors, such as income, business interests and the other elements in your investment portfolio. A Certified Financial Planner will be able to help you find the sweet spot – ensuring you’re protected no matter what, but not spending a cent more than you need to.
Palesa Tlholoe is the Co-Founder and a Wealth Manager at Imvelo Wealth