Like an annual dental check-up or a long overdue vehicle service, taking stock of one’s financial position is an activity which is at best tedious, and at worst depressingly alarming. Tedious because, no doubt, sorting through benefit statements, policy documents and tax forms is undeniably cumbersome; and alarming in the sense that there may be gaping voids in one’s financial munition that leave one unnecessarily exposed. Financial peace-of-mind is not only knowing how much you have, but understanding what you have and why you have it. Here is our advice on how to effectively unpack your financial portfolio, and re-stack it so that it more effectively caters to your needs.
1. Your Will
For many of us, our first Will is drafted when we get married, amended when we have children to make provision for inheritance, and then filed away for safe-keeping. Because family relationships and friendships change over the years, it is worth checking your Will to ensure that the guardians you appointed for your minor children are still the people you would like your children’s care entrusted to should you die. It is also possible that the people or institutions you appointed as executors to your estate have passed on or, in the case of banks and law firms, no longer exist. Any discrepancy or anomaly in your Will causes unnecessary delays in the Master’s Office, and will slow down the distribution of your Estate. When reading through your Will, make sure you are comfortable with the answers to these questions: Who will inherit my earthly belongings? Who will look after my children? Who will be responsible for wrapping up my affairs? Do my loved ones know where my Will is kept? Have I destroyed all previous versions of my Will?
2. Life insurance
Life insurance forms a significant part of one’s financial portfolio during what we refer to as the “accumulation phase” – those years that are characterised by marriage, career-building, babies and progressive wealth creation. During these years, we require life cover to secure our home loans and to provide for our loved ones should we die. We also require disability cover to protect our incomes if faced with disability or incapacity. Over time, however, our income escalates, our home loan reduces, our children leave home and our net worth grows in value – a combined set of factors which significantly reduce the need for life cover. Individuals could end up contributing heavily towards unnecessary life and disability cover, whilst at the same time compromising their retirement funding. Reducing and adjusting one’s life cover over time often means freeing up extra cash which can be channelled more effectively to boost one’s retirement investments.
3. Beneficiary nominations
Every policy or investment held by any individual can be bequeathed to a beneficiary nominated by its owner. In many instances, especially where policies have been in force for a number of decades, it is difficult to recall exactly who the nominated beneficiary is. As families grow, friendship evolve, business structures change and companies fold, policy owners very often forget to amend the beneficiaries of these policies – an omission that can lead to people inheriting from your estate unintentionally.
4. Medical aid
When first being diagnosed for a chronic illness and prescribed chronic medication, one’s first reaction is often to upgrade to a more comprehensive medical aid option. Over the years, however, the cost of chronic medication has been driven down by the production of generics, and it is worth re-assessing whether the cost of being on a comprehensive plan still makes financial sense.
5. Group life benefits
Changing employment sometimes involves a dramatic shift in group life and retirement benefits, and almost always necessitates a review of one’s financial plan. Many employers provide remuneration packages that include life insurance and a provident or pension fund, and it is vital to understand what role these benefits play in your overall portfolio. One’s group life and pension benefits must be assessed together with any life cover and retirement funding that hold in your personal capacity. It is perfectly possible that one is over-insured in one’s personal capacity because similar benefits are being provided by one’s employer. Similarly, many people are not contributing the full tax deductible amount to their retirement funding because they do not fully understand how much they are contributing to their pension fund.
6. Full disclosure on your insurance policies
In general, insurance companies take a bad rap when it comes to paying out claims; and whilst, in many instances, consumer complaints are legitimate, there also exists an onus on the insured to keep the insurer fully informed and updated on their health and smoker status. If you took out a life insurance policy as a non-smoker and subsequently start smoking, you have a duty to advise your insurance company in order for them to re-underwrite you based on the new risk factors. Failure to keep your insurance company updated means they will have possible grounds to reject any future claims based on what is referred to as fraudulent non-disclosure. Ensure that all your personal health information is fully disclosed to your insurer.
7. Bond cover
Anyone who has ever purchased a home will know that, in order to qualify for a home loan, the bond originator will insist the home owner has personal life cover to the value of the bond. As the amount of one’s home loan reduces monthly, the same cannot necessarily be said for your life cover, which generally remains at its original level. As an annual exercise, check your home loan balance against your bond cover, and adjust where necessary.
8. Paid up retirement annuities
Before the emergence of the unit trust-based retirement annuities, most retirement annuities originated with large insurance companies. These retirement annuities were extremely onerous and charged the policy owner exorbitant fees for early cancellation and withdrawal. Thankfully, South Africa’s retirement legislation has been amended in favour of these policy owners by removing unnecessary penalties and making provision for these funds to be transferred, where required. If you have old retirement annuities in place, it is worth having them reviewed by an financial planner.
9. Hospital insurance plans
The traditional hospital insurance plan, which for many years was a popular product sold by insurance agents, is in fact not a medical aid. Instead, it is an insurance policy which pays out a pre-determined Rand amount depending on the operation or procedure that is performed. There are multiple problems with these policies, not least of which is that many of the insurance companies who sold these policies no longer exist as a result of mergers, acquisitions and closure. In addition, the field of medical surgery has evolved so significantly over the past 30 years, that many of the operations and procedures listed on these policies are no longer performed; and many of the new surgeries are not covered by these policies.
As laborious as it may initially seem, the process of unpacking and re-stacking your portfolio will undoubtedly save you money, re-align your benefits to your goals, and tighten the security of your financial future. In the powerfully simple words of investment guru, Peter Lynch, “Know what you own and why you own it.”
Have a fantastic week!