Letting go of life cover, even if you are teetering on the brink of your financial limits, is likely to be a very big mistake with dire financial consequences for your loved ones, warns the Association for Savings and Investment South Africa (ASISA).
Hennie de Villiers, deputy chair of the ASISA Life and Risk Board Committee, describes life cover as your most valuable financial asset, which can become impossible to replace as you grow older.
“If you are struggling to make ends meet the temptation to let go of your life cover can be overwhelming. But before you make this irreversible mistake, weigh up the expense of your monthly premium against the dire financial impact the loss of your income could have on your family.”
“South Africa is in choppy economic waters, and letting go of your life cover would be like throwing your life jackets overboard and simply hoping for the best, ” he says.
De Villiers notes that according to actuarial models, as many as 383 families are expected to lose a breadwinner every day in South Africa, demonstrating that the unexpected can and does happen all too often.
“Without the support of life insurance, the reality is that your family would then either need to find additional income or be forced to drastically cut back on their living expenses,” he says.
He explains that this could mean that your family would need to sell their home or car in order to downsize and deal with the burden of any outstanding debts, or become dependent on relatives for support. Your family could also become extremely vulnerable to any unforeseen expenses such as medical costs.
“For your children this may also mean attending more affordable schooling, and could impact their options for further education or leave them heavily dependent on student loans,” he says.
He adds that if you are planning to cancel your life insurance now and reapply again at a later date, you should remember that your premiums are likely to be substantially more expensive. You may also be uninsurable or face serious exclusions.
“Age is an important factor in determining your life insurance premiums, and life cover is generally much cheaper when you are younger and healthier,” he explains.
According to De Villiers, a healthy, non-smoking 25-year-old male could qualify for R2 million of life cover at a monthly premium of around R294. A healthy, non-smoking woman of the same age would pay as little as R190 a month for the same amount of cover. With a level premium pattern, the cost of this life insurance should remain the same for the rest of their lives, even if they developed serious illnesses later in life.
The table below shows the cost implications if either of them cancelled their life cover and then decided to reapply later in life. By age 45 the cost of life cover would more than double from what it would have cost at age 25.
Life insurance premiums – R2 million underwritten whole life cover
Source: Sanlam Personal Finance
“It is also important to note that if you are diagnosed with a health condition such as diabetes or cancer before you apply again, some companies may refuse to offer you life insurance,” says de Villiers.
“Others may place exclusions and limitations on your policy, refusing to pay out if you die of this particular condition. Alternatively, they could load your premiums, making the cost of your cover more expensive relative to other people your age.”
He cautions that even if you skipped only a few premiums, your life insurer would still take any deterioration in your health into account when considering whether to reinstate your policy.
“If you miss a premium payment, you therefore need to contact your life insurance company as quickly as possible to make alternative payment arrangements and reinstate your cover.”
Alternative solutions for dealing with financial difficulties
De Villiers states that if you are in financial difficulty and are considering letting go of your life cover, there are a number of alternative solutions that you should first consider. These include:
- Reducing your monthly expenses – Critically evaluate all your monthly expenses, and first cut back your spending on non-essential expenses such as your satellite television subscription. Be realistic about your wants versus needs.
- Renegotiating your debts – You could approach your bank and creditors to negotiate the terms of your debt repayments, as your creditors may be willing to accept smaller monthly repayments over a longer period of time. You could also approach a debt consolidation agency to help you package your debt and deal with your creditors, but be sure to choose a reputable agency and consider the fees charged carefully before signing up. You can find more information on registered debt counsellors on the National Credit Regulator’s website.
- Pausing your savings – You could pause your contributions to a unit trust portfolio, or take a “payment holiday” from your endowment policies and retirement annuities. If you have a significant amount of expensive short-term debt on credit cards and store accounts, you could then channel these funds into repaying your debt more quickly. However, stop your savings for short and medium-term goals such as a holiday or purchasing a house before you consider pausing vital long-term savings towards goals such as your retirement.
- Streamlining your short-term insurance – Short-term insurance on your home and vehicle is important, but you could reconsider whether you need comprehensive allrisk insurance that may include your jewellery and mobile phone for instance. You could also reduce your add-ons such as insurance for your car sound system.
- Examining your health and life insurance policies – If you need to further reduce your health and life insurance premiums, you should try to prioritise your insurance in the order of what is most likely to happen and what can have the most significant impact on your family’s financial wellbeing. It is important to take account of your own health and family history in making these choices, preferably with the assistance of your financial adviser.
- Negotiating your premium payment pattern – If you recently purchased level premium life cover, you could request to change to an escalating premium pattern where your initial premiums will be lower and increase over time. This would enable you to keep the same amount of cover while giving you some short-term financial relief. In some instances you may be asked to undergo medical underwriting before the insurer is willing to make these changes to prevent anti-selection whereby a client who is diagnosed with a terminal illness switches to an increasing pattern to save premiums until death.
- Reducing your life cover – As a last resort, you could consider reducing your life cover amount in order to reduce your monthly premiums. You should be aware, however, that the effectiveness of this solution will depend on when you initially purchased your life cover, as your age and health may impact your new premiums.
He emphasises, however, that the best approach to dealing with financial trouble is to acknowledge that you need help and consult a professional financial adviser.
“An adviser will be able to examine your financial situation objectively and guide you on making the best decisions appropriate to your individual needs,” he says.
Issued on behalf of:
Hennie de Villiers
Deputy chair: Life and Risk Board Committee
Association for Savings and Investment South Africa (ASISA)
ASISA represents the majority of South Africa’s asset managers, collective investment scheme management companies, linked investment service providers, multi-managers, and life insurance companies. These members hold assets under management of R9-trillion.
Issued on behalf of:
Hennie de Villiers
Deputy chair: Life and Risk Board Committee
Association for Savings and Investment South Africa (ASISA) ASISA represents the majority of South Africa’s asset managers, collective investment scheme management companies, linked investment service providers, multi-managers, and life insurance companies. These members hold assets under management of R9-trillion.