OPINIONISTA: The Financial Wellness Coach: Should you cancel life insurance when your bond is paid? – Daily Maverick
Answer: I like to approach financial planning in a focused way, so here is some advice:
Investments are made for specific reasons – they have time horizons and investment components that match those time horizons.
Risk cover is there to cover specific risks. It is not there to enrich you – that is what your investments are for. If those risks do not exist anymore, then there is no need to have the risk cover.
Regularly revisit any risk cover you have and see whether it is still needed. There is no point in paying high premiums to cover a risk that no longer exists. You would be better off investing the money than paying for unnecessary cover.
One has life insurance to cover a risk. These risks would include:
Looking after people who are dependent on you;
Ensuring that your family’s lifestyle is maintained should you no longer be around; and
Covering debt that you may have.
As you have paid off your home loan, the life cover that was there to cover that debt is probably no longer needed.
Do you have any new risks?
Before you cancel any life insurance, check if you have any other risks that could be covered by having the life insurance. Remember, as you get older, it becomes increasingly difficult to get life insurance as you will have picked up a few medical issues over the years.
I would recommend that you contact a financial advisor and do a risk assessment. When I do risk assessments for people of your age, I find that the need to have life cover to cover debt and support minor children has pretty much disappeared. However, there is a new need that has to be covered – that of the costs of wrapping up your estate without having to sell assets.
There are three big costs when wrapping up an estate:
Capital Gains Tax
Executor fees
Estate duty
These figures can be quite high. If your estate does not contain a lot of liquid investments that can pay these fees and taxes, the executor may have to sell assets, such as property, at a time when it may not be opportune in the market. If you have life cover, these costs could be met with the proceeds of a policy.
I would therefore recommend that, before you cancel your life insurance, you get your financial advisor to do an estate plan for you in which he or she draws up a liquidation and distribution account as if you or your partner had passed away. This will give you a good idea of the costs that could be incurred. You can then see if these costs could be met by your current liquid investments. If there is a shortfall, you could determine how much of your life cover you should keep.
Life insurance as an inheritance
If there are no more risks to cover, any life insurance payout will add to the value of your estate and provide an inheritance for your heirs. This is something that you can consider if you can afford the premiums, and it makes financial sense.
I have come across situations where elderly pensioners are reluctant to give up their life insurance cover even though they are struggling to make ends meet and have no risks to cover. They argue that they have paid for it for so many years and it seems like a waste to give it up. My recommendation to them is to get their children to give them the money to pay the premiums. This way, the children are able to get the tax-free payout (after estate duty is deducted) and the parents do not waste money on risk cover they do not actually need.
So, to summarise, life insurance is there to get rid of risks. You need to determine:
Whether there is still a risk; and
Whether there are any new risks. DM168
This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.
