I Don�t Need Life Insurance, or Do I?

Correspondent | Monday October 9, 2017 16:21

We need to take time out and digest the reasons for buying life insurance as well as arguments against life insurance.

Like most financial planning matters, when life insurance is carried out well and for the right reasons it serves you well. The most important thing is to get the financial priorities right. What do I mean? While life insurance might be first priority for Person A, it may be third priority for Person B.

Perhaps Person B wants to build a university fund for their children, while Person A has few assets and wants to make sure their kids would be protected if they die early.

Individuals will have different financial goals and priorities at different stages of their lives (we also have different fears).

What is Life Insurance Again? It is a risk contingency plan that takes effect upon the death of the holder or life assured. You are essentially reducing the damage that could be caused by the loss of your life. This might be damage caused to your dependents or to your business. Life insurance should not be confused with funeral insurance, which is more of a quick cash payout.

It can be used for several reasons including:

Ensuring that your partner and children are taken care of when your active income is not available anymore This may sound crude but it is normally gauged by how much you actually care about what happens to your dependents in the event of your death. Perhaps your partner can pick up where you left off, however doing what two or more household incomes were doing can be hard. With that said, the risk is even higher if yours is the sole income. Providing for children’s education or any shortfalls on a university fund you may already have in place. You’ve been saving up for your children’s university fund, your son or daughter is due to go to university in 10 years so that’s your timeline for saving and investment growth, but you die in year six. Who covers the shortfall that may be caused by this? 

 

Paying off inheritance tax

This is tax charged to your beneficiaries on the inheritance you have left them. Yes, this is a real thing that many of us do not take account of. Whether you have a substantial amount of wealth to leave to your beneficiaries or not, this is a key area for you. Look into it. In the event of your death, a portion of your life insurance may be used to cover inheritance tax. Paying Off Debts

The insurance added to your loan is generic, it does not take into consideration your individual circumstances therefore it is almost always more expensive! Using your own insurance policy will usually result in a lower premium payment. You have this option, so don’t just sign on the dotted lines when you take out a loan. If you’re considering applying for a mortgage, this is a key area for you.

Insuring Against the Death of a Partner or a Major Shareholder When a business partner or major shareholder dies, the remaining shares will pass go to their beneficiaries. This is often the family of the deceased who may or may not be concerned or equipped with the knowledge of the business. The partners or other shareholders may need to buy the shareholding from the beneficiaries of the deceased in such a case. There are several ways of guarding against this and a Buy-Sell agreement, funded by life insurance is one of them. Most of us need to address these issues and most of us have not built up the assets to address them in the event that we die today, tomorrow or a few months down the line.

 

The Counter Argument

Sure enough there are several arguments against life insurance. For example: I’m young, I have no dependents Fair enough, you’re 26 with no kids but perhaps your income is the sole household income. Who takes care of your parents if something happens to you? If your parents don’t depend on you or they leave earth before you then you could always use it to negotiate a lower mortgage premium for a new property. Consider it. Plus you could lock in a low premium when you are still young. I have a successful business and my family will be well taken care of Agreed, this is a valid case but perhaps you want to check on other issues such as their continued educational needs or inheritance tax. I struggled to get where I am so my children need to work hard as well Understood. Is that what your partner and children would think as well? How old are your children? How long until they have to work? Perhaps they’re still far off or they are already coming up well in the income generating world.

The point is, if you want to rule out your need for life insurance make sure you have exhausted the possible damage that can be left in the event of your death. The life insurance world has developed immensely and you do not always have to have the highest cover. Seek qualified financial planning advice to ensure you get the cover that best suits you, your family or your business.

©S.C.I.Group. Author: Katrinah Mmusi – Financial Adviser with the S.C.I. Group. S.C.I. Financial (Pty) Ltd. is a registered Investment Adviser, giving financial planning advice, financial education and debt counselling distress. For help and information contact 3180111 or advice@scifinancial.com