Long-term insurance encompasses a wide array of products and numerous service providers, often requiring expert guidance for effective financial planning. These products serve various purposes across different life stages, necessitating careful structuring to meet specific objectives. This article explores the strategic use of long-term insurance products throughout life stages to maximize outcomes and ensure financial goals are realised.
Early career
Early in your career, especially if you are single without financial dependents, securing income protection is crucial. This insurance ensures you receive your designated income in case of temporary or permanent disability until retirement age. Despite its apparent simplicity, income protection involves rigorous underwriting. Insurers assess factors such as your occupation, involvement in hazardous activities, health, pre-existing conditions, smoking habits, medical history, and family health background. Starting young and healthy can lead to more favourable premiums and underwriting terms, making early adoption advisable. As your income fluctuates, regularly review and adjust your cover to prevent a shortfall in cover. Indexing your income protection to inflation ensures your benefits maintain purchasing power over time. This proactive approach ensures your financial safety net adapts to changing circumstances, securing your income against unforeseen events throughout your career.
Buying property
When purchasing a property financed with a home loan, your financing institution will likely require life cover matching your bond amount. This ensures adequate liquidity to settle the home loan should you pass away. While most banks mandate this type of cover, keep in mind that you aren’t obligated to buy their offered policy. It’s often more cost-effective to explore independent life cover options or integrate life insurance into your current income protection plan. Additionally, consider adding a capital disability benefit equal to your bond value, ensuring full loan settlement in case of disability. Shopping around allows you to tailor cover to your specific needs, potentially securing better terms and comprehensive protection for your property investment.
Getting married
Marriage generally prompts a comprehensive review of both partners’ insurance cover to ensure financial security in unforeseen circumstances. A joint life policy can be customised to meet individual needs for life, disability, and dread disease cover, often at a more economical rate than separate policies. When it comes to beneficiary nomination, keep in mind that Section 4(q) of the Estate Duty Act provides that the value of all property accruing to the surviving spouse is deductible from the gross estate of the deceased’s estate. This means that where you and your spouse nominate each other as beneficiaries to your respective life policies, the proceeds will be paid directly to the surviving spouse and will not attract estate duty nor executor’s fees.
Calculating the appropriate insurance cover involves assessing factors such as outstanding home loans, other debts such as vehicle or credit card obligations, future financial support needs, and estate liquidity. Including dread disease cover in your policy can provide a financial cushion should either spouse face a life-threatening illness, supplementing existing medical aid and in-hospital cover. Tailoring cover to match your specific circumstances and existing protections minimises financial risks associated with severe illnesses, ensuring comprehensive protection for you and your spouse.
Having children
During this life stage, securing sufficient life cover to provide for the future living and education costs of your children will be of paramount importance, although the correct structuring of such cover is important from an estate planning perspective. Where the proceeds of a life policy are intended for the future care of your minor children, think twice before naming your minor children as beneficiaries on the policy. Keep in mind that, because children under the age of 18 are not legally capable of inheriting, any funds bequeathed to them will likely be housed and administered by the Guardian’s Fund on their behalf. To avoid this happening, consider setting up a mortis causa trust in terms of your last will and testament and nominating the trust as the beneficiary to the life policy intended for your minor children. By nominating your minor children as beneficiaries to the trust, the proceeds of the policy will be paid directly to the testamentary trust in the event of your death, whereafter your nominated trustees will administer these funds in the best interests of your children. When setting up such a structure, give careful thought to the trustees you appoint to look after your children’s interests and consider nominating alternate trustees in the event that one or more are unavailable at the time that the trust is formed.
Employment
Securing formal employment typically prompts a reassessment of your long-term insurance cover, particularly if your new employer provides group life and disability benefits. Group underwriting often results in more favourable premiums compared to individual policies, potentially allowing you to reduce personal cover and save on premiums. It’s worth noting that group life cover is typically based on a multiple of your annual salary, such as three times your income, rather than tailored to your specific financial goals.
As such, it’s important to calculate your own life insurance needs independently to ensure the group cover aligns with your requirements. Before cancelling personal insurance, verify that your needs are adequately met by the group policy. Additionally, ensure the group risk cover includes a continuation option, allowing you to maintain the policy at individual rates after leaving your job. This option guarantees insurability post-employment, providing financial security even if you change employers.
Own business
If you are a shareholder in a business alongside others, it is prudent to consider implementing buy-and-sell insurance, especially if a significant portion of your wealth is tied up in your business shares and included in your estate planning. Buy-and-sell insurance ensures that upon your death, surviving shareholders have the financial means to purchase your shares, allowing the proceeds to benefit your intended heirs. This type of insurance involves securing life cover on each shareholder based on the company’s valuation and their respective shareholding.
With a properly structured business assurance agreement, the proceeds from such a policy are exempt from estate duty in your estate. Unlike other assets, business assurance policy proceeds are not considered part of the deceased estate’s deemed property, offering a unique advantage in estate planning. To qualify for this exemption, you must be a shareholder at the time of your death, and the policy must be explicitly intended to facilitate the purchase of your business interests following your passing. This strategic use of buy-and-sell insurance ensures continuity for your business and protects the financial interests of both surviving shareholders and your beneficiaries.
Retirement planning
Disability cover is frequently overlooked in retirement planning, yet it plays a crucial role in ensuring financial security. While income protection safeguards your current income in case of disability, it’s equally vital to plan for continued retirement savings. Integrating a disability scenario into your retirement strategy helps determine the necessary capital amount required. By securing this sum through lump sum disability cover and investing it appropriately, you can ensure sufficient post-retirement income. This proactive approach not only protects against potential income loss but also reinforces long-term financial stability during retirement planning.
Building wealth
During your wealth accumulation years, long-term insurance is crucial for safeguarding yourself and your loved ones against death, disability, and severe illness. It is especially important for settling debts, providing estate liquidity, and supporting your surviving spouse and children. Your long-term insurance should be integrated into your overall estate plan, ensuring it aligns with your goals while considering the tax, capital gains tax (CGT), and estate duty implications. As your net worth increases and your debt decreases, regularly review your long-term insurance to avoid paying for unnecessary cover. For example, as your home loan diminishes, you might reduce your bond cover accordingly. Likewise, as your retirement assets grow, you can consider lowering your capital disability cover since your retirement funding shortfall decreases. Approaching retirement, be sure to perform accurate liquidity calculations before cancelling any remaining life cover. This cover can be vital for ensuring estate liquidity, especially when the bulk of your assets are tied up in retirement funds or illiquid properties. Ensuring your long-term insurance is properly structured and regularly reviewed will help protect your financial future and provide peace of mind for you and your family.
Have a fantastic day.
Sue
