THE FINANCIAL WELLNESS COACH
How to make your life insurance policy cover more affordable
Question: I have noticed that the premium of my life insurance policy has doubled over the past couple of years. As I have now recently retired, I am concerned that this will become unaffordable should this trend continue. What should I do?
Answer: Before we look at what you should do, we need to understand why you have life insurance. There are four main reasons for having life insurance:
- To cover specific debts like a home or business loan;
- To cover potential liabilities like estate duty;
- To replace any income that your dependants would need to live on should you no longer be around; and
- To provide an inheritance for your family.
When you look at your life insurance, do any of these reasons still hold true? If they do not, you have no real reason to keep the policy running. If any of them are needed, then we need to find ways to make the cover more affordable.
Reduce the cover
As you get older, your debts should reduce so the cover needed to cover that would also reduce. When you retire, the cover that is needed to cover your salary would probably disappear.
Get your financial adviser to check if you have sufficient assets to cover any estate duty, capital gains tax and executor fees. If you have, then you may be able to reduce your life insurance cover and in so doing make the premiums a lot more affordable.
Change the premium pattern
An old trick that life insurance salespeople use to reduce your initial premium is to use a payment increase pattern that is based on your age. When you are young, these increases are not that big, but as you get older, you will find that the increases are significant and your premium could double every five years.
What you can do is to approach the underwriter that provided you with the cover and see if they will allow you to change the premium pattern. You can, for example, give up on future increases in cover, reduce your cover and move onto a premium basis that increases by a fixed amount each year.
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A concern that I often get from people with insurance policies is that they paid into them for so many years and it would be a shame to let that disappear. The truth is, you took the cover to cover a specific risk. If that risk no longer exists and your financial analysis indicates that you do not need any more life insurance, then the only reason for keeping it would be as an investment for your heirs.
The problem with having life insurance as an investment is that no one knows when they are going to die. If you live to 100, keeping the insurance as an investment is a bad deal. However, should you die within 10 years, then it is probably a deal which cannot be met by any other investment.
If you want the insurance as an investment and cannot afford the premiums, you could offer it to your beneficiaries. They would take over the payment of the premium and, when you die, they will receive a tax-free payout (after deducting the 20% estate duty). Before you go this route, I would recommend that you get a financial planner to do the compound interest calculation to see if it does indeed make financial sense. DM/BM
Kenny Meiring MBA CFP is an independent financial adviser.