Finance – Avoid Being Over-Insured
How many policies do you really need? Which ones are vital? We sought the answers to help you plan your future financial priorities
The popularity of funeral covers in black communities would have you believe we are obsessed with “burying our loved ones with dignity”, when the reality is that most black people are playing catch up and are uninformed about what comprehensive financial planning entails. It takes financial planners years of study to understand product structures, their benefits, the markets they are designed for, the legislation and how to plan around them.
Experts stress that you also need to equip yourself with similar financial education when it comes to policies and investments, so you can make better insurance and investment choices.
NEED FOR FINANCIAL POLICIES
People often think that a policy is something that would benefit them when they die, says Noma Shinga, a senior financial planner at Standard Bank.
“They don’t consider the financial benefits that pay out while they’re still alive. This is because of a lack of understanding on the product or misinformation about financial products in general,” Shinga points out.
On the other hand, a common mistake many people make is not with the insurance they choose, but signing for policies and buying them like shelf products, says financial planner, Keketso Mabasa.
“Financial products are not shelf products and require profound knowledge to make suitable decisions. My advice is to demand that a thorough financial needs analysis be done and explained to you, before you commit to buying products. Go the extra mile and request assistance with budgeting,” Mabasa says.
You also need to use the services of financial planners the same way you use doctors, say Mpumi Mbilase, an independent financial planner at Masthead Financial Planning.
“Like proper healthcare, financial education is a right and a necessity. And we’re here to provide it, and to help with budgeting, so that people can make informed decisions,” Mbilase says. Check and make sure that the financial planner is accredited, experienced and not just offering products to meet his commission targets, she adds.
POPULAR POLICIES AND FINANCIAL PLANS
Among black communities, funeral policies are by far the most common, followed by short- to medium-term investment plans, such as a notice deposit account and a money market account – but these alone are not sufficient.
“Better value in returns can be found in endowments and retirement plans in the long run,” Mabasa advises.
Research shows that black people are not fully covered for death, disability and dreaded diseases, reveals Busi Moeng, an independent financial planner.
“If the breadwinner dies, the family will suffer financially because the funeral cover won’t take care of the family. Our people need life cover that covers them comprehensively, so that the family’slifestyleisnotcompromised when the breadwinner dies. The funeral policy covers for the short term, while a life policy ensures long-term financial stability for your dependents,” she explains.
“Education policies are also popular and equally important,” Shinga says.
HOW POLICIES WORK
Generally, with every policy, you get what you pay for, and are covered according to your income and what you can afford. However, again, the importance of understanding your product cannot be overemphasised.
“You have to understand the circumstances under which the product pays, especially if it’s a risk policy like life cover, disability, or funeral plan. This is because these products come with terms and conditions that must be met before the product provider can pay the claim. You must disclose as much information as possible, to avoid rejection at the claim stage,” Shinga says.
Can you lose money in a policy? What about the number of policies to have? How many is too many? “There are no standard industry rules on how many policies one may have. What’s important is that the discovered shortfalls be eliminated. However, in some cases, if one has many policies and claims for one incident from different companies, the Financial Service Providers may average the claim amount. This is most common in short term insurance,” Mabasa says.
Having over 10 funeral policies that are a repetition of the same cover amount is not beneficial, Mbilase cautions.
“You can have a life cover for the same premium amount of a funeral cover. It’s cheaper to have life cover than multiple funeral policies that won’t support your family after you die. Life cover comes with a funeral plan, and it’s ideal when you want to cover a relative and have insurable interest, meaning you will not suffer financial loss should that relative die,” she explains.
EMERGENCY INVESTMENT OPTIONS
A money market call account with a bank can be used during emergencies as funds are available immediately upon request, Shinga advises.
“You also can use a unit trust money market account or fixed interest type of unit trust which your financial adviser can help you with. Unit trusts in general are not meant for short-term savings or emergencies. Different institutions offer different products, depending on your needs,” she explains.
“Speak to an accredited financial adviser for options to make an informed decision. Unit trusts are good investments but need to be understood as capital protection is not offered,” Shinga advises.
A tax-free investment comes highly recommended. This allows you to invest up to R33 000 per year or R500 000 over a lifetime with no tax implications. If your contributions go above the mentioned limits, the exceeding amount will be taxed at 40%, Mabasa explains.
“Whatever financial product you take, it’s very important to always review it, at least once a year, to see if it will still serve your future needs, and to consider life changes,” Shinga concludes.