Life insurance: the most misunderstood financial tool
People see life insurance as just that and misunderstand the vehicle’s potential in terms of comprehensive financial planning. If structured properly it forms a solid foundation for financial security and can be utilized to protect families, businesses as well as build long-term wealth with a generational perspective.
There are plenty of misconceptions and confusion around life insurance, which is the reason why many people avoid buying it for themselves and for their family members, but instead opt for funeral cover, which does not make sense if you look at their financial needs. Not many consumers understand how it works, much less how to purchase it.
Do not let this deter you as this is where a financial adviser comes in. Having said that, it is important to make a distinction between financial advisers and insurance agents, the latter do not conduct a proper analysis of your needs and simply give you whatever product you ask for whether you need it or not.
Dependant on the structure the money that ‘grows’ inside the policy may be tax free and completely creditor proof, so no one can get to that money if something ever happens from a credit perspective.
It is advisable to start your insurance journey when you first get employed. Young people often believe it is not needed and that they are invincible. Accidents do happen and dread disease and disability are not myths. Another reason to get insured while you are still young is that entering into a life insurance policy becomes more expensive as you age and if your health does deteriorate it can become unaffordable or you may be uninsurable, and you may not qualify for cover. Even single people who have no dependents need cover. You may be able to reduce your cover once you reach the breakeven point of asset accumulation and are able to self-insure, although it is very risky to depend solely on your investments into the future.
Some people think that it is better to have savings than insurance, while I am of the firm belief that savings are important, I disagree with this sentiment. As an example, let us assume that you can save R5 000 per month and 2 years into the savings term you are diagnosed with a critical illness that requires you to be out of work for more than the standard sick leave permitted. You may need to be hospitalized for treatment and the consequences can be detrimental to your financial security as the R120 000 in your savings account will not be enough to cover your medical shortfalls and replace your income. Besides, you never know when you might use your savings for something else.
“Fun is like life insurance; the older you get, the more it costs.”
Those with employer-based insurance schemes also often feel a false sense of peace without putting their benefits to the test. This is a dangerous assumption because once you leave that employment the cover falls away and as previously stated, the older you get, the more expensive the cover.
The key is not to leave life insurance out of your budget, in fact it must be considered before short-term insurance for your car and household contents.
If you cannot afford it then you cannot afford that car…