Navigating the financial planning arena alone can be daunting, especially when it comes to understand the various products and solutions available to consumers. In this article, we explore the nature of 6 financial planning solutions, how they work, and whether or not they’re appropriate for your portfolio.
Advance healthcare directive
An Advance Healthcare Directive is a document that sets out your wishes for future medical treatment if there ever comes a time when you are unable to communicate. An Advance Healthcare Directive only becomes effective when you lose the ability to communicate for yourself through injury, illness or other medical condition. This document allows you to set out detailed instructions on what medical treatment you do and do not consent to in various scenarios. An Advance Healthcare Directive allows you to appoint a medical proxy (normally a partner or close family member) who will make decisions on your behalf if you are incapacitated and can include specific details regarding treatments, medical interventions, pain management, infection control and palliative care at the end-of-life stage. It can be a particularly valuable document for the families of those in advanced stages of dementia, persons in a permanent vegetative state or those suffering from a terminal illness. If you would like a say regarding your medical treatment in the event that you cannot speak for yourself, and if you would like to appoint a spouse, friend or family member to be your medical proxy in such circumstances, then an Advance Healthcare Directive is worth considering.
An income protection benefit is designed to replace your income or a portion of your income should you become disabled and unable to generate an income. While you are young and still accumulating your wealth, your ability to generate an income is your greatest asset and should be protected at all costs. When taking out an income protection benefit, you will need to determine what level of income you would like to insure and until what age. In general, most income protection benefits cease at age 65, although this can depend on the insurance company. When deciding what income to protect, you should take into account your debt, retirement funding shortfalls and monthly living costs. 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.
If an injury or illness prevents you from earning a living, will you be able to pay the bills? If not, then you need an income protection benefit. If your illness or injury puts you off work for three months, you may have enough money in your emergency fund to tide you over. But, what if it is a lifelong disability or illness that permanently affects your ability to generate an income? Would you be able to pay your bills and save for retirement? If not, then you need an income protection benefit.
If you are a member of a medical aid, you will know that your medical scheme does not guarantee full cover – especially when it comes to specialist consultations and procedures. Many medical doctors and specialists charge more than medical schemes will pay. This creates a shortfall ‘gap’ between what the medical aid is willing to pay and the actual cost of the medical practitioner. Gap cover is a short-term insurance policy that covers this shortfall (up to certain limits) in the event of hospitalisation, medical treatment and certain out-of-hospital procedures. Bear in mind that you have to be a member of a medical scheme to qualify for a gap cover benefit. Also, it is important to consider your health status and that of your dependants when making the decision to purchase gap cover. If you are comfortable that you can self-fund the shortfall in the event of a hospitalisation, then you may not need gap cover. However, bear in mind that hospitalisation is very expensive and some medical practitioners charge in excess of 600% of medical aid tariff. If you can afford it, gap cover is definitely an option worth considering.
Tax-free savings account
In general, a Tax-Free Savings Account (TFSA) should be viewed as a long-term savings vehicle in order to achieve maximum benefit from it. The greatest benefit of a TFSA is that all proceeds earned from it – including interest income, capital gains and dividends – are exempt from tax. This means that you get your full investment return without being taxed on the growth you earn. Unlike retirement fund contributions, it is important to bear in mind that contributions towards a TFSA are not tax deductible.
Annual contributions towards TFSAs have just been increased to R36 000 per year, with the annual limit remaining at R500 000. If you do not use your annual contribution of R36 000 in a tax year, you will not be permitted to roll it over to the following year, and your contribution will therefore be forfeited. Your investment horizon, goals, returns, debt levels, income and the extent to which you are making use of the other tax-efficient savings options are all factors to be considered before setting up a Tax-Free Savings Account. Before investing in a TFSA, it makes sense to ensure that you are first maximising your tax-deductible contributions towards a registered retirement fund, such as an employer pension fund or retirement annuity as the tax benefits of a retirement fund outweigh those of a TFSA.
General power of attorney
A power of attorney is a formal document by which a person (the principal) authorises another (the agent) to conclude juristic acts on his behalf. By signing a power of attorney, the principal indicates to third parties that he will be bound by the acts performed by his agent. Essentially, a power of attorney can be used to give someone else the right to manage your affairs if you are physically incapacitated or unavailable to do so yourself. If you are physically ill, aged and/or physically impaired, you may want to consider giving your spouse, adult child or close friend power of attorney over your affairs. If you plan to travel out of the country for an extended period, you could grant someone power of attorney over your affairs in South Africa while you are travelling. It is important to bear in mind that a power of attorney automatically lapses if the principal becomes mentally incapacitated, which means that it cannot be used where a person suffers from dementia or Alzheimer’s disease. This is because, in terms of our law, an agent cannot do that which the principal has no capacity to do himself.
A Will is one of the most important documents in your estate plan because it allows you to determine how your assets will be distributed when you die. Freedom of testation means that your written Will can include detailed instructions of whom you would like to benefit from your estate. In addition, your Will can be used to ensure efficient administration of your deceased estate, provide for your dependants, reduce estate duty liability and protect the assets intended for your minor children. In the absence of a Will, the state will appoint an executor dative to wind up your estate in accordance with the law of intestate succession, which could result in people whom you would not necessarily have appointed as heirs inheriting from your estate.
If you own immoveable property and other assets, are married and/or have children, then you should have a Will in place. Through your Will, you are able to make provision for your spouse and children in the event that you pass away. A testamentary trust, which you can set up in terms of your Will and which only comes into being on your passing, is an effective vehicle to house assets bequeathed to your minor children. Having said that, anyone over the age of 16 can write a Will and appoint an executor to wind up his estate.
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