DO YOU REALLY NEED ALL THAT LIFE ASSURANCE WHEN YOU RETIRE?

Life assurance plays a crucial role in many people’s lives, therefore, when taking out life cover, you should review it as your needs change and reduce it over time as your assets and liquidity grow.

To start, I want to state that life assurance fulfils a crucial role in many people’s lives. Everyone should have life insurance at some point in their lives. On the flip side, as a company, we cancel more life assurance than we put in place.

Life assurance must be taken with intent and with purpose. In my view, life assurance must be adjusted and managed just like investments. Cover must be need-driven and adjusted as needs change.

In a perfect world, life cover should be reduced as assets and liquidity increase to the point where very little or no life cover is in place.

When is life insurance crucial?

Life insurance is important when families are young and debt is high. This brings me to the point: what is the purpose of life assurance?

The main reason for life assurance is to provide loved ones with sufficient capital to ensure that their lifestyle is maintained or improved should you die. This brings me back to young families.

Young couples with children, home bonds, vehicle finance, school fees, retirement provision and all the other financial pressures that young families face are most in need of life assurance. Sufficient life assurance will ensure financial stability in the event of a breadwinner’s or spouse’s death.

A lack of life cover (or assets) will bring hardship to the surviving family.

I want to deviate a little. We often encounter young, unmarried people who have life insurance. Why? When questioned, they state that their parents insisted they have life insurance to settle car debt, study loans etc. or that it is the right thing to do. For whose benefit?

If institutions granted loans or finance without security or a requirement for life insurance, then tough luck to them. As long as the parents didn’t stand surety, life insurance premiums should rather be directed towards investments.

For young, unmarried people, the most important risk to cover is the loss of income due to injury or sickness. That is done through income protection, not life insurance.

Their life insurance needs will become crucial when they have children, and more so when they own property with a bond. As soon as a surviving partner/spouse finds it difficult to survive without the income of the other partner, life insurance comes into play.

So, what about older people who have accumulated wealth and no longer have school fees and bonds to pay?

Life assurance and investments (including other assets) should function like a counter-balance scale. When debt and liabilities are large, life assurance should be at a maximum.

As one’s asset base grows and debts are reduced, life assurance should be trimmed to the point where life insurance cover is at the bare minimum.

One must not lose sight of the fact that life assurance is an effective and relatively cheap way to pass wealth onto someone else. This is handy when there are not many assets to pass on at death. The amount of cover will depend on every individual’s personal requirement and situation.

What factors must be considered to determine how much life insurance is enough for retirees?

Debt: Bonds, vehicle debt, bank debt, loan accounts (owed to companies and trusts). Any debt that will raise a claim against a deceased estate and ultimately reduce the net estate value.

Estate planning: What is bequeathed to whom? Determine what the estate duty implications are, especially where fixed assets/illiquid assets like property are bequeathed, resulting in estate duty and CGT. How is this going to be paid?

Improper planning may skew your wishes if insufficient capital is available to cover seen and unforeseen costs.

Bear in mind that where there is a differential between who inherits an asset and who inherits the ‘residue’, imbalances are bound to come into play. Life assurance can counter this, as can careful planning.

Where a planner wishes to leave a predetermined amount of cash to beneficiaries, and insufficient capital is available in the estate, life insurance can fulfil that wish.

Be mindful that life assurance is a deemed asset in your estate and will be subject to estate duty of at least 20% where a beneficiary is not a spouse of the deceased.

Remember that a loan made to a company or a trust is an asset in your estate and must be repaid by the entity to which the loan was made. If the entity is named in your will as the beneficiary of the loan, estate duty of at least 20% will apply to the loan amount.

This is often a complication in popular structures in which an individual takes funds offshore and then ‘loans’ them to an offshore company or trust to fund investments within the new entity.

Unless a spouse inherits the loan, estate duty will become payable on the loan amount. Even if a spouse inherits the loan, estate duty is just deferred until the spouse passes away.

Marriage regime: Are you married, in community of property (ICOP), out of community of property with accrual (ANC), divorced, or single? Each of these regimes has its own rules, potential claims against an estate, and an impact on the net estate value.

If you are married in community of property (ICOP), a very different ball game applies, where estates are combined and then halved. Careful planning is required to determine the life assurance requirements for each spouse, especially where the estate/s are asset-rich and cash-poor.

Assets: Are there sufficient assets to cover inheritance and future income requirements for a surviving spouse, special needs children and other financial dependents? If the answer is yes, no life assurance is needed. If the answer is no, then life assurance may be required or bequeathments needs to be adjusted.

Be mindful of fixed assets, such as property. Liquid assets will be required to cover death duties. Only cash or life insurance can serve that purpose if you want to avoid selling assets to cover costs.

Careful planning and strategic structuring of investments can prevent assets from being sold and replace the need for life insurance.

Liquidity: Are there sufficient liquid assets to cover death duties, executor fees, income tax, CGT, future income, and debt? If not, life insurance can fill the shortcoming. If yes, cancel excess life insurance.

It is advisable to approach a professional to compile an estate liquidity analysis for you. This should provide a clear indication of a shortage or a surplus of life insurance.

Life insurance is an efficient and cost-effective way to fund cash and liquidity in the estates of young couples, especially in the short term. In the long term, premiums could become prohibitively expensive, especially if one opts for all the bells and whistles offered by some providers who thrive on rewards and bonuses.

Age-rated premium patterns and enhanced ‘rewards’ can lead to annual escalations that are multiple times higher than inflation. Plan carefully and try to understand where your premiums will be heading in 10, 15 and 20 years’ time.

This will be a challenge, since many of the calculations and assumptions that will determine premium escalations are difficult to understand or unknown.

Ride the seesaw and rebalance the scale when you can. Build your assets and liquid investments while reducing your life insurance as your debt decreases. Ideally, you want only sufficient life insurance to cover death duties and perhaps some taxes. The rest should be covered by your investments.

Plan well and enjoy the feeling of reduced life insurance premiums over time.