Building financial security through long-term insurance

Long-term insurance spans a wide range of products and providers, and plays a critical role in financial planning. These products meet different needs throughout life, and careful structuring is essential to ensure they support your broader financial goals. This article explores the strategic use of long-term insurance through key life stages.

Starting your career: At the start of your working life, particularly if you’re single and have no dependants, your most important asset is your ability to generate an income. Income protection cover provides a monthly income should you be temporarily or permanently disabled before retirement. While this type of cover may appear simple, it is generally subject to complex underwriting where insurers assets factors such as occupation, lifestyle risks, health status and family history meaning that it's generally advisable to put this type of cover in place while you’re young and healthy – and to review your cover regularly as your circumstances change.

Buying a home: When purchasing a property financed by a home loan, your bank will likely require life cover equivalent to your home loan, which ensures that your bond can be settled in the event of your passing. Keep in mind that you’re not obligated to take out the cover proposed by the bank, and it may be more cost-effective to shop around for your own insurance cover, especially as this will allow you to structure the right combination of cover depending on your needs.

Marriage and joint cover: Marriage is an opportunity to review both partners’ insurance needs and, when doing so, consider implementing a joint life policy that can be structured to cover each spouse for life, disability, and dread disease cover generally at a lower cost than two individual policies. From an estate planning perspective, naming your spouse as the beneficiary of your life cover can reduce estate duty and executor’s fees. This is because, in terms of Section 4(q) of the Estate Duty Act, any amount paid to a surviving spouse is deducted from the value of the deceased estate, making it a tax-efficient structure.

Raising children: As your family grows, you will want to ensure that you have sufficient life cover to provide for your children’s future, although keep in mind that careful structuring is required. As children under the age of 18 are legally entitled to inherit, it’s wise to avoid nominating minor children on your life policy. Ideally, consider setting up a testamentary trust in your will and naming the trust as the policy’s beneficiary. This will ensure that the proceeds of your life policy are paid to the trust in the event of your passing, where they will be managed by your appointed trustees for the benefit of your children.

Starting formal employment: Group life and disability cover are often included as part of one’s employment benefits, with group underwriting generally resulting in more favourable premiums. That said, keep in mind that group cover is generally calculated as a multiple of your annual income and may not necessarily match your actual needs. As such, when taking up formal employment, ensure that you fully understand your group cover before cancelling any personal insurance. Further, determine whether your group cover includes a continuation option that allows you to retain your cover at individual rates should you leave your job.

Owning a business: If you’re a shareholder in a business, implementing buy-and-sell insurance can ensure continuity and liquidity for your estate. This type of insurance ensures that any surviving shareholders have the financial means to purchase your shares should you pass away, although this type of policy must be structured carefully. If correctly structured, the proceeds of buy-and-sell cover are not considered deemed property in your deceased estate and are therefore excluded from estate duty purposes. To qualify, the policy must be intended for the purchase of shares in the event of your passing, and you must still be a shareholder at the time of death. 

Planning for retirement: Disability cover is often overlooked when it comes to retirement planning. Whereas income protection is designed to replace lost income, it’s also important to plan for the continuation of retirement savings in the event of disability. To achieve this, consider calculating the lump sum required to replace future contributions and securing that amount through capital disability cover. This approach can add a critical layer of security within your retirement plan. 

Building and preserving wealth: While you’re accumulating your wealth, long-term insurance is crucial for protecting your loved ones against death, disability, and severe illness, to settle debt, and to provide estate liquidity. As your net worth increases and your debt decreases, regularly review your long-term insurance to avoid paying for unnecessary cover. For example, as your home loan diminishes, you might reduce your bond cover accordingly. Likewise, as your retirement assets grow, you can consider lowering your capital disability cover since your retirement funding shortfall decreases. 

Long-term insurance is not a once-off decision but a lifelong strategy that should evolve with your circumstances. By structuring and reviewing your cover at each life stage, you can protect your income, family, and estate, ensuring lasting financial security and peace of mind for yourself and those you care about most.

PERSONAL FINANCE