Many draw­backs to poli­cies that com­bine sav­ings and risk cover

Weekend Argus (Saturday Edition) - - PERSONALFINANCE - LAURA DU PREEZ and ANGELIQUE ARDÉ

It may seem like a good idea to take out a life as­sur­ance en­dow­ment pol­icy that com­mits you to set­ting aside money for your child’s ed­u­ca­tion and guar­an­tees your sav­ings goals will be met if you die pre­ma­turely or be­come dis­abled and can­not earn a liv­ing. But you may, in fact, be bet­ter off pro­vid­ing for your sav­ings and your life as­sur­ance needs sep­a­rately.

One of the main rea­sons is that if you can­not af­ford the monthly premi­ums – be­cause, for ex­am­ple, you lose your job – the life com­pany may im­pose a penalty of up to 15 per­cent of your sav­ings. This charge may re­duce to noth­ing over five to 10 years, but un­til then you will be at risk.

A few life as­sur­ers of­fer a re­trench­ment waiver, which is a ben­e­fit that will pay your premi­ums for about a year if you are re­trenched, or they will al­low you to take a “pre­mium hol­i­day” of, for ex­am­ple, 12 months over the life of the pol­icy in the event of a fi­nan­cial cri­sis, but th­ese ben­e­fits add to the costs.

Natasja Nor­val-Hart, an in­de­pen­dent fi­nan­cial plan­ner with Sasfin, says premi­ums on en­dow­ments are low, but the costs are of­ten high.

“My first ad­vice to any­one look­ing at an ed­u­ca­tion pol­icy is: be very crit­i­cal of the costs. You don’t want to be los­ing value be­cause of costs.”

Jan-Carel Botha, an in­de­pen­dent fi­nan­cial plan­ner with Ul­tima Fi­nan­cial Plan­ners in Pre­to­ria, says another draw­back of a pol­icy that com­bines sav­ings and risk cover is that you may not know what por­tion of your premi­ums is used for sav­ings and what por­tion funds the risk premi­ums.

Life as­sur­ers pay tax on en­dow­ment poli­cies on your be­half at 30 per­cent and then pay out a taxfree amount at the end of the in­vest­ment term. But Botha and Nor­valHart say that most young fam­i­lies who need to save for ed­u­ca­tion are on mar­ginal tax rates of be­low 30 per­cent, which makes an en­dow­ment an in­ap­pro­pri­ate ve­hi­cle.

If you sep­a­rate your sav­ings and life cover and use a dis­cre­tionary prod­uct, such as a unit trust fund, to save for your chil­dren’s ed­u­ca­tion, you must en­sure that your risk life cover is suf­fi­cient to fund their ed­u­ca­tion and other needs. Your need for this cover will be great­est when your chil­dren are young and will de­crease as they get older.

Nor­val-Hart says she spends a lot of time with her clients with chil­dren look­ing at risk plan­ning.

She says some com­pa­nies of­fer an an­cil­lary ben­e­fit to a life pol­icy that pays tu­ition costs on the death or dis­abil­ity of a par­ent. The ben­e­fit is paid di­rectly to the ed­u­ca­tion in­sti­tu­tion – this avoids the prob­lems of who will get the money or the money po­ten­tially end­ing up in the Guardian’s Fund (if par­ents leave their as­sets to mi­nor chil­dren).

She says par­ents can pay for this cover as long as they need it.

Botha says that a dis­cre­tionary in­vest­ment such as a unit trust gives you the flex­i­bil­ity to use your sav­ings as you wish. You may start to save for a child’s ter­tiary ed­u­ca­tion but later use the sav­ings for pri­vate school­ing or pay for un­ex­pected med­i­cal ex­penses, he says.

Life com­pa­nies some­times point out that their poli­cies have guar­an­tees on in­vest­ment per­for­mance. How­ever, in or­der to pro­vide a guar­an­tee, the life com­pany will of­fer you a lower re­turn.

Botha says that, be­cause you are likely to save for ed­u­ca­tion over a long pe­riod, you are un­likely to need a guar­an­tee. The re­turns from the eq­uity mar­ket can be volatile over shorter terms, but, on av­er­age, the eq­uity mar­ket will sel­dom de­liver neg­a­tive re­turns over a longer term, such as five or 10 years.

If your term is shorter than five years, you can in­vest in an in­ter­est­bear­ing unit trust fund that has no ex­po­sure to eq­ui­ties, he says.

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