Life Cover Essential Even in Tight Economic Conditions

Ian Wason

Losing a loved one is never easy. However, coming to terms with the death of a spouse or parent is even more devastating if the family is left with the financial burden of mounting debts, should no life cover be in place.

“It is essential to have appropriate life cover determined by a qualified financial adviser. This can only be done through a comprehensive financial needs analysis,” says Craig Harding, managing director of Altrisk. “Even though the natural temptation is to cut these seemingly unnecessary costs, life cover becomes even more important when finances are under pressure.”

“In stressful economic times, we would all like to ensure that our loved ones will be financially secure after our death. This is why there is an even greater need for a life cover policy when you are under financial strain,” explains Harding.

Life cover provides one’s family with a lump sum, which should sufficiently cover an array of needs after your death. It provides your beneficiaries with security in a variety of ways; such as paying of a mortgage, replacing your salary, securing education expenses and helping your business stay afloat.

This view is echoed by Ian Wason, CEO of the IDM Group, owner of DebtBusters, South Africa’s largest Debt Counsellor which focuses on resolving the debt problems of individuals across South Africa. “Debt is quickly becoming an epidemic, affecting people of all incomes and backgrounds.”

It is an important part of DebtBusters’ debt counselling strategy to ensure that clients have a current life insurance policy. This protects the family of the insured by securing assets such as the family home. It also provides an additional layer of protection by repaying existing debt. This frees the family of debt repayment concerns, while protecting creditors. But convincing a client that they need life insurance when they are drowning in debt is no easy task. “This is where a full financial needs analysis comes in,” adds Wason.

The average DebtBusters client under debt review is 37, has an individual monthly income of R17000 or household income of R34000 and holds debt amounting to an average of R550000. Of this, between R150000 and R200000 is short term, high interest bearing debt. In addition, 55% of those under debt review have home loans and 75% have vehicle finance. “Statistically, our clients either have life cover in place with unnecessary benefits or they do not have cover at all.

To conduct a comprehensive financial needs analysis we look at a client’s debt profile, as well as any investments the client has and whether these are worth keeping in the face of mounting debt. The answer to this question depends on two variables – the rate of interest the client is paying on debt (usually 20% or more) versus the rate of return expected on any investments (usually no more than 6% in the current economic climate). It makes no sense to hang onto a low interest bearing investment in the face of high-interest debt that originates from things such as credit cards and department store charge accounts. This type of debt is the deadliest and the sooner it can be paid off the better,” explains Wason.

Altrisk’s Craig Harding adds that the repercussions of leaving a spouse or next of kin to shoulder this level of debt, should one die without cover in place, are potentially financially devastating for many years to come; if not insurmountable.

“Chances are that your estate will be swallowed up by debt repayments and your family will bear the brunt of being left with no home and no financial security,” says Harding.

“It is a very difficult balancing act. Our consultants review a client’s existing cover and, if necessary, try to find a better premium for them. We seldom – if ever – advise clients to discontinue life cover to reallocate those funds towards their debt repayment. However, many clients pay for individual credit life cover policies on individual debts. By consolidating all of their debt, we can acquire one holistic life cover policy. This reduces the aggregate amount that they pay on individual credit life cover and provides better protection for less money,” says Wason.

“If the client does not have existing cover, their budget is reviewed by their debt consultant to establish whether they can afford to pay for some form of credit or life cover, while paying their credit providers. In many cases they cannot afford life cover when they apply for debt review, as they need to allocate all available funds to credit providers. However, as they reduce their overall debt they are able to allocate part of their annual salary increases to appropriate life cover. So by the time they come to the end of their debt repayment plan, they are completely covered with insurance,” concludes Ian.

The need for insurance cover even in tough financial conditions cannot be emphasised enough.

“Balancing ones’ debt repayment while maintaining insurance cover is about managing the cost of your personal insurance without under-insuring in the process. The emphasis must be on right-sizing your cover and seeking economies where they are to be found – a task which a professional advisor is qualified to help you with,” concludes Craig Harding, Altrisk.