By Schalk Malan
When you think of your savings plan, life insurance is not likely to be the first thing you associate with saving up for what is important to you. Most people see life insurance as a grudge purchase, something that you only benefit from should something happen to you.
On the surface, life insurance doesn’t seem to have much to do with those financial goals you set yourself, such as paying off your bond for example.
But it’s important to see life insurance, disability and critical illness cover and your savings as important vehicles that work hand in hand, as part of your financial plan for now and the future. Here are three things to bear in mind when balancing what you spend on insurance versus what how much you set aside for savings.
Structure your cover efficiently so you can have more left over for savings
You should ensure that you structure your life insurance policy so you’re managing your premiums as efficiently as possible, paying as little as you can for adequate life cover so you have additional amounts available to supplement your savings. Getting needs-matched cover is key and it’s vital that you term your life insurance and disability cover appropriately so that you are not overpaying for a period of time that you don’t need that cover.
The most important aspect to bear in mind is to make sure that your life insurance policy covers you appropriately and that you’re paying affordable premiums now and in the future so that you can free up money to save for your children’s education, for example. Structuring sustainable life insurance premiums is really important so that you keep the cover that you need in place, instead of being forced to reduce or cancel it in a few years’ time if it becomes unaffordable.
Evaluate your portfolio regularly
It’s important to set up regular sessions with your financial advisor to reassess your financial portfolio and make changes if necessary. For example, perhaps you have taken out some life insurance to pay off your bond in case you become disabled or pass away. You recently came into an inheritance, however, and have used this money to pay off your bond. Because you no longer need this cover for your bond, it is a good idea to move that cover to an area in your policy where you are possibly underinsured, or to move that amount into a savings vehicle like your retirement policies. You should be continually rebalancing your cover to make sure your levels of cover for different needs are appropriate. This will help in keeping all aspects of your financial plan relevant.
Know that a critical illness or disability can drain your savings
Critical illness has an important link to savings. For example, you could become disabled in a car crash and need to make multiple changes to your living situation, such as ramps and modifications to your bathroom and kitchen.
If you don’t have cover in place for this eventuality, the money will need to come from somewhere and unfortunately that will mean digging into savings like retirement funds. A small emergency fund will not be enough to pay for the significant additional expenses that could arise from a serious illness or injury.
In summary, then, even though your life insurance cover and your savings are separate aspects of your financial plan, it’s important that you see them as interrelated. They also need regular evaluation, especially when it comes to cover, so you can make sure that your policies are always efficiently structured and maintain affordability into the future.
You want to get the best out of your cover so that you can set money aside for what you want and need to save for. And make sure that if something happens to you, your investments don’t get eroded because of poor risk planning.
Schalk Malan is chief executive of BrightRock.