Life cover
Life cover can be effectively employed to provide for your child in the event of your premature death, although it is important to take into account your unique circumstances when determining your insurance needs. For instance, you may have an ex-spouse who is financially dependable and who you trust will provide for your child financially should something happen to you, and you may want to take this into consideration when determining your life cover needs. In the event of your death, you would ideally want to ensure that your child’s living and educational costs are provided for up until around age 23. This would involve taking out sufficient life cover to provide your child with a lump sum which, if invested, would provide for her ongoing financial needs until she is able to provide for herself. When nominating your minor child as a beneficiary on your life policy, bear in mind that in terms of our law, a minor (in other words, a person under the age of 18), cannot inherit on the basis that she lacks contractual capacity. In the absence of a testamentary trust set up for the protection of your minor child’s assets, any funds left to your child in terms of your life policy would be administered by your child’s legal guardian. If you have not appointed a legal guardian for your child in terms of your Will or no legal guardian exists, the funds will be invested in the Guardian’s Fund where they will be administered until your child reaches age 18. It is therefore imperative to ensure that any life cover you take out for your child’s future financial protection forms part of your overall estate plan.
A Will
Your Will is essential to the structuring and implementation of your estate plan, and it is always advisable to get advice in this regard. If you are the sole guardian of your child, appointing a legal guardian in terms of your Will is essential. Importantly, ensure that the person you nominate as guardian to your child is fit and proper, and be sure to confirm with the person that he/she is happy to assume the role in the event of your death. In order to protect the assets you intend bequeathing to your minor child, it is advisable to set up a testamentary trust in your Will. A testamentary trust comes into existence in the event of your death, and all assets bequeathed to your minor child will be housed in the trust and administered by the trustees appointed in terms of your Will. In the absence of a testamentary trust, any assets bequeathed to a child under the age of 18 will be administered by the child’s legal guardian, who could be your ex-spouse or your child’s other parent. In the absence of a legal guardian, the assets will be administered by the Guardian’s Fund which is not ideal. As such, appointing a legal guardian and setting up a testamentary trust in your Will are two absolute essentials as a single parent. Be intentional about who you appoint as trustees to your testamentary trust, keeping in mind that you will need to trust them completely to act in the best interests of your child if you are no longer around.
Income protection
As the sole breadwinner, protecting your ability to generate an income is paramount and putting an income protection benefit in place is therefore critical. If you become ill or disabled, whether temporarily or permanently, and unable to generate an income, you and your child will be left in a precarious financial position. When determining the level of income protection you need, give careful consideration to your living expenses, debt and your retirement funding needs. It is important to ensure that, when putting an income protection benefit in place, the income keeps pace with inflation. Bear in mind that an income protector does not cover income lost as a result of retrenchment. When taking out cover, be sure to determine whether any exclusions apply to your policy as this will affect your ability to claim in future. In general, exclusions are placed are pre-existing medical conditions. It is also vital to know whether any waiting periods apply before you can claim for a benefit. If your policy includes a three-month waiting period, bear in mind that you will need to have sufficient emergency funding to tide you through this period. Remember that an income protection benefit does not provide cover in the event of retrenchment or loss of income as a result of a global pandemic, and you will need to prepare for this eventuality through your emergency funding.
Emergency fund
On the topic of emergency funding, building a ‘rainy day’ fund for single parents should be a top priority. If you rely on the monthly maintenance from your child’s other parent to cover your living expenses, be sure to keep the equivalent of at least three months’ worth of maintenance payments on top of your normal emergency cash. As a single parent, you do not have the luxury of a partner’s income to fall back on in the event that you are retrenched or unable to work, so consider building an emergency fund that will cover at least six-months’ worth of expenses.
To set up your emergency fund, open a separate account with a reliable financial institution. Ensure that your money is housed in an account that is easily accessible, such as a transactional account or money market fund. Once again, be sure to put your money in an account with an interest rate that at least matches inflation otherwise your money will lose value. It is advisable to set up a debit order each month to your emergency fund until you have reached the desired level. Another savings option for your emergency fund, if you are a homeowner, is to put away extra money into your bond each month. By putting extra money into your bond, you are not only saving for a rainy day but also reducing the interest you pay on your bond, which saves you more money. Building an emergency fund up to this level can be overwhelming, especially when money is already tight, but start small and be consistent in stashing away a small amount every month.
Education plan
Saving for future educations costs weighs heavily on most single parents’ minds. How you choose to save for your child’s tertiary education depends to a large extent on how soon you begin saving. If you started saving when your child was born, you would have the advantage of being able to invest in a higher risk portfolio that targets higher returns over the longer-term, bearing in mind that your investment horizon would be approximately 18 years. If you haven’t started saving and only have a few years left to do so, it would be wiser not to expose your money to short-term market volatility and instead channel your savings into a money market fund. You can also consider making use of a tax-free savings account as a funding vehicle for your child’s education, with the obvious benefit that all proceeds earned from your TFSA are exempt from tax – although bear in mind that the contributions you make towards a TFSA are not tax deductible. If you choose to save towards a TFSA, remember that your contributions are limited to R33 000 per year, with a total lifetime contribution of R500 000 – with most TFSAs providing complete contribution flexibility. Importantly, keep in mind that if you open a TFSA in your child’s name, you will effectively be using part of their tax-free allowance which may prevent them from saving in a TFSA later in life. It may therefore be advisable to set up the TFSA in your own name but earmark the funds for your child’s future studies. In terms of withdrawals, you are free to withdraw from your TFSA at any time which means your money will be accessible when the time comes to pay deposits and upfront study-related costs.
Have a great day.
Sue
