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5 September 2018
“Many of us buy our first long-term insurance policy when we become parents or when we’ve acquired a property. But there are other not-so-obvious uses of life cover. Some options can actually provide financial security for you while you are still alive,” says David Thomson, Senior Legal Adviser at Sanlam Trust.
While some banks may not require you to cede a life policy to them in order to obtain a mortgage bond, Thomson says it will still help you to take out a policy. “Whether you have kids or not, in all likelihood you would still want your property to be inherited by your surviving family members, instead of being repossessed by a bank. That way your loved ones can get an opportunity to sell it at its market value if they don’t want to keep it.”
Thomson says if you receive spousal or child maintenance, you should consider taking a life policy on the life of the maintenance payer.
“Having a policy in place can ensure continued payment in the event of the maintenance payer’s death. It’s advisable to add rider benefits like disability cover and income protection benefits to the life policy, so that you can continue to receive the financial support even when the person paying the maintenance is unable to work due to disability or illness,” Thomson explains.
Thomson adds that you should provide for any outstanding debt you may have, especially debt on assets you own, such as vehicles and/or business assets and business debts you signed surety for.
“If there is not enough money in your estate to cover your outstanding debt, creditors may attach your family’s assets and they might face the possibility of losing these assets. If you had business partners and you didn’t keep your business assets separate from your personal estate, your partners may also be forced to close down the business.”
When you pass on, you may incur estate duties and your family will need to pay a fee for the executor to wind up your estate. Thomson says many estates in South Africa have a cash shortfall and executors are often forced to sell some of the assets bequeathed to heirs in order to wind up the estate. You will also need cash to settle claims for maintenance from your spouse and/or former spouse, not to mention any children you may leave behind.
The proceeds of a life policy will usually be protected from personal creditors and insolvency if the policy has been in force for at least three years.
If a trust is nominated as the beneficiary of the proceeds of an insurance policy, Thomson says the trustees can protect the proceeds of a life policy that otherwise might be squandered away by irresponsible heirs.
You may have identified a key employee or partner as a prospect to take over your business when you retire or pass on, or if you are rendered unable to work. This person will need money to purchase your business from you or at least pay a deposit. With an appropriate agreement in place, a policy taken out by him or her may provide the funds for this.
“Although this may seem daunting, don’t worry – with proper advice and guidance through a detailed financial plan, a competent financial adviser can help you quantify how much life cover you need to cover all these needs.”