From finding the best life cover to improving your credit score without getting into debt, we answer all your questions about money matters.
WHICH LONG-TERM LIFE COVER IS THE MOST COST-EFFICIENT?
I am the main care provider for my 42-year-old, medically disabled brother. If something happened to me, we would need to have enough money to pay for a caregiver. I want to take out R4 million life insurance, but I am not sure which premium will be the most cost effective in the long run. Insurance that is age-rated is less expensive now, but I am worried the premiums will become too expensive over time and we will lose the cover. What is the most cost-effective premium in the long term that will insure the cover keeps up with inflation?
Schalk Malan, CEO of
insurer Brightrock, replies:
A funding pattern is how premium increases are structured to allow you to afford your life insurance cover over time.
It’s important to understand that there is a trade-off between initial premium affordability and the long term affordability of cover and premium increases.
In principle, the most cost-efficient funding pattern over time is the least aggressive option, as it’s also the most sustainable funding pattern.
With a so-called level funding pattern, where cover remains more or less level, or increases annually at inflation, premium increases are lower, but the initial premium is higher compared with more aggressive, or age-rated funding patterns.
However, people often opt for a lower initial premium – and/or a lower initial level of cover – which then increases aggressively with age. This is called an age-rated funding pattern and is a more prevalent one in the market. However, it is neither efficient nor sustainable. A study published by BrightRock and True South Actuaries in 2012, showed that most people with an age-rated funding pattern end up with unsustainable premium increases or insufficient cover, or both. This is because, as premiums increase and become increasingly more expensive, people are likely either to buy down or lapse their cover owing to affordability constraints.
Probably of more importance though, is a related issue: the inefficient structure of the underlying cover. Traditionally, policyholders buy a lump sum of cover that simply grows over time, until they reach retirement age. This future growth in the cover is priced into the premium upfront and is priced for the policyholder’s expected lifetime (usually to age 110 years), and therefore contributes to the monthly premium costs from day one.
To help to counter this initial expense, age-rated premium patterns discount the initial cost and then price in significant future premium increases over time. However, the purpose of the lump sum is to fund the monthly income that the insured life would have earned until retirement age, when their retirement savings should kick in – not to fund their income for their whole lifetime.
It is far better to follow a “needs-matched” approach. This calculates how much income is needed each month to replace the income of the provider until retirement age, rather than their entire life. This takes into account that, over time, the actual lump sum required will reduce and not increase, because as the client gets closer to retirement, they need to protect fewer pay cheques. This can also be used, for example, for life cover to provide financial support for children until they become financially independent.
This structure is more cost efficient, freeing up substantial savings that translate into more cover and a lower premium at the outset. These principles apply irrespective of the funding pattern. It means that clients can choose at the claim stage whether they wish to receive the regular monthly amount or capitalise it into the lump sum, or receive a combination of both.
In this example:
- We assumed that Jenny was also 42. We assumed best rates;
- The R4 million lump sum yields an income of R17 272 (growing at CPI) to age 65, which will protect her earnings and ability to provide the same level of care for her brother after her death, as if she were still alive and working;
- We’ve assumed a sustainable long-term premium increase of CPI + 3.5%; and
- By using needs-matched cover, which insures the recurring amount with the ability to capitalise the income (of R17 272 increasing at CPI) at claim stage – as opposed to a traditional lump sum structure simply growing over time – the client will save around R349.92pm (50% saving). If they opt to use the premiums savings to buy more cover and more fully insure the need, they can increase the income provided from R17 272 to R35 839, and thereby get R8.3 million (108% more cover) for the same premium.
HOW DO I IMPROVE MY CREDIT SCORE WITHOUT CREDIT?
I recently settled all my debts through the debt review process and I am planning to apply for a home loan around December next year. At the moment, I am busy saving up for my 10% deposit.
My only worry is I might not have a sufficient credit score when it’s time to apply. I don’t want to take out a credit card facility or store card. Is it possible to improve my credit score without having to open any credit facilities?
City Press replies:
Banks want to have good quality customers, so just because you do not have a credit card or store card history, that should not be a reason to turn you down. A bank would prefer someone with no credit history than someone with a poor credit history.
In fact, a customer who has taken the tough step of debt review and finished the process would be seen as someone who takes their obligations seriously. This would not count against you in your application.
There are ways to show the bank that you are a good credit risk, beyond your credit score. Firstly, building up a 10% deposit would show the bank that you have the disposable income available to service the home loan. If you set up a stop order to put money into a savings account each month to build up that deposit, that would reflect positively and show you can commit to monthly payments. Any contractual agreements that you have, such as insurance policies, would reflect favourably if you meet those payments each month. Your bank would look at your overall banking behaviour to determine whether you manage your finances appropriately. You have worked hard to be debt-free – keep it that way.
WILL MY DIVORCE AFFECT MY TAX-FREE PORTION AT RETIREMENT?
My wife and I are in a process of divorce and she is asking for half my pension money. My question is, will she pay tax on her portion if she withdraws the money and will it affect my R500 000 tax-free amount at retirement?
Wouter Fourie, certified
financial planner, replies:
The Taxation Laws Amendment Act, 22 of 2012 introduced the “clean break principle”. It means that if a pension fund forms part of the divorce agreement, the non-member spouse can withdraw their portion, either as cash, or transfer it to a preservation fund. If the non-member withdraws, the amount will be taxed in the hands of the non-member. This means that if your wife does take a portion of your pension fund, any tax consequences will only affect her. They will not affect your R500 000 tax-free lump sum on retirement.
WHERE CAN I GET INDEPENDENT ADVICE?
I have a question regarding pre-retirement planning. Is there such a thing as completely independent advice when it comes to preparing for a new life stage when leaving the corporate environment? I need holistic advice on the best medical scheme, what short-term insurance I should have, how to live off my savings and preserve my retirement benefits and about tax. Where do I find these answers, or should I just start finding them myself?
City Press replies:
There are many independent financial planners specifically for clients entering the retirement stage. A good practice will provide information beyond just the figures and help you decide how you want to live your retirement years and whether your concept of retirement is realistic – not just financially but also emotionally.
Most of these practices work with a group of companies in order to provide a holistic financial solution that includes short-term insurance and medical cover. Any financial plan should include these elements as they have a direct impact on your income needs.
Most of these practices work on a fee basis and charge for a holistic financial plan. Depending on the complexity of your financial needs you can expect to pay anywhere from R10 000 to R20 000 for a proper plan. The best place to source an independent practice is through the Financial Planning Institute. Their members are all certified financial planners and are held to high standards.
A proper retirement plan is worth spending money on as it will ensure you understand your financial needs. It will provide you with a realistic view of what is possible and what is not. Too often retirees overspend in their first few years, depleting their capital and then end up becoming financially dependent on family.
Understand your product benefits
Khumbu wrote to City Press a few weeks ago, after she was retrenched, to find out what her options for her retirement annuity contributions are.
“I know I won’t be able to afford monthly contributions to the policy in future. What options do I have in order to avoid losing all the money/benefits I have contributed? Can I move the money to a preservation fund? What are the penalties?”
We suggested that she contact her adviser, as there are different types of retirement annuities. Many of the newer ones that are investment linked do not have penalties.
If you cannot continue with payment, your money remains intact for your retirement and you can start contributing again when your financial situation changes.
For polices where you are locked in, there is usually a retrenchment option which can either cover your premiums for a few months or provide for a “payment holiday”. After contacting her insurer, Khumbu discovered that her policy offered a payment holiday of up to six months.
What is concerning is that Khumbu has no relationship with the adviser who sold her the retirement annuity. It is important to remember that, if you bought a financial product through an adviser, that adviser is receiving ongoing commission from your investment. It is therefore their responsibility to help you should you have any queries or face a life-changing event.
Your first port of call should be the adviser. If they are unable to help, or if you have lost contact with them, you need to inform the product provider so they can either provide a new adviser or allow you to cancel your annual fee.
Do you have any pressing questions about your money and how to look after it?
SMS us on 35697 using the keyword MONEY and let us know. Please include your name and province. SMSes cost R1.50