The importance of having adequate insurance in place is often stressed by financial advisors and experts. However, it is important to keep in mind that your insurance needs will change throughout your life. The needs of a single, working 25 year old will differ greatly from a retired 65 year old. As your financial situation chances, and as major life events such as marriage or children arise, you will need to ensure that your insurance will cover the expenses and needs associated with your responsibilities.
Having the right insurance in place reduces the financial burden on you and your family should something happen. For example, if you become disabled and are unable to work for an extended time at 30 and will rely on your parents to look after you, your parents most likely would not have factored looking after an adult dependent into their financial planning.
Starting young
From the moment you start earning a salary, it would be best to put insurance in place, especially the likes of disability insurance.
Henk Meintjes, head of risk product management at Liberty, highlighted: “When you are young, single and have no dependants or debts it would benefit you to invest in a disability policy and a retirement plan. In addition as a young adult your ability to earn an income is your biggest asset, and it needs to be protected. If you are disabled and unable to work for an extended period or permanently, you would need to have a way to replace that income, not only for yourself but for your family, and those that would need to take care of you in this eventuality.
“There are various types of disability cover so it is important to speak to a financial adviser to provide you with a financial needs analysis. Many people think they can weather the storm of a temporary illness or injury, but the fact is that very few can. It may not be necessary to have life cover, if you have no dependants.”
Your changing insurance needs
Once you have people who are financially dependent upon you, such as a spouse or children, or if you have debts, taking out life insurance becomes necessary. Life insurance can cover a range of financial needs following your death, ensuring that the people you leave behind have peace of mind knowing that (at least some) financial issues are taken care of.
Among the reasons you should have insurance are:
- Paying your debts
Debt is something that can accumulate from a young age, from taking out student loans, to purchasing a car, house or furniture when you first start to work. It is important to ensure that should something happen to you, you have a policy in place that will pay off these debts. If you do not have insurance to cover existing debt when you die, the burden to pay this off falls to your dependents or next of kin.
- Ensuring that your dependants are provided for when you are not there
When you have others who are financially dependent on you, it is important to make sure that they will still be looked after when you are no longer there. Meintjies pointed out that when you are married, and you and your spouse have a combined income, this is reflected in your expenses. For example, you may buy a more expensive house than if you were living on a single salary.
“Should one of you pass away, then the other may not be able to afford the expenses on their own or maintain the lifestyle that comes with a dual income,” noted Meintjes.
- Paying estate duty
Estate duty is a tax paid when you die, on the market value of all your cash and non-cash assets (currently 20% in SA), explained Meintjes. This amount will be deducted from your estate, and to prevent your beneficiaries being left with little money to support them after you are gone, Meintjes suggested using life insurance cover to pay this, meaning that you your beneficiaries will not have to liquidate your assets to pay the estate duty.
- Your needs later in life
“Later in life, if your savings and investment plans have been properly worked out and adhered to, you should have a steadily increasing net worth. Eventually, your investments should be large enough to ensure a comfortable life for you and your spouse in the absence of that monthly salary cheque,” said Meintjes.
Ensuring you have enough to survive on later in life, requires careful planning at the beginning of your life and saving towards your retirement. A personal financial plan should be drawn up for you to ensure that your financial needs and those of your dependents or beneficiaries are met. An accredited financial advisor would be able to assist you in developing the best financial plan for your needs, including what insurance you should have in place.
Reviewing your insurance
It is advisable that you reassess your insurance on an annual basis. Meintjes revealed that regularly reviewing your cover will ensure that it remains in line with your needs and financial situation.
“Increased saving may have reduced your need for cover but you may also have more dependants to support or a more expensive lifestyle to protect. In difficult economic times affordability is also often an important consideration but so is maintaining your cover. Speak to your financial advisor or insurer if you are considering cancelling your cover to hear if there are alternative solutions,” said Meintjes.
In addition to the types of insurance mentioned above, Meintjies added that lifestyle protection covers against the risk of being burdened with the cost of surviving and recuperating from some form of critical illness or unexpected traumatic event.
“These events include cancer and heart-related conditions which may not directly impact your ability to earn an income but may still require lifestyle adjustments or leave you with bills not covered by medical aids. Options exist to extend this cover with specific female and child-related critical illness benefits,” added Meintjes.
