Budgeting for the Future: How Your Life Insurance Policy and Savings Plan Work Together
Clyde Parson, chief innovation officer at BrightRock
This week, our Finance Minister, Enoch Godongwana, will deliver his budget speech, which will outline the government’s planned spending for the next year. In his speech, Minister Godongwana will highlight the areas of need – such as housing, education and health care – that the government intends to prioritize in terms of the budget it allocates to each sector.
Now, while it’s probably taken for granted that you don’t have access to the billions of rands that the government makes, the principle of budgeting – planning your monthly and annual expenses – should apply to anyone earning an income. A key aspect of budgeting is saving, and it’s often overlooked as the cost of living rises and our culture of short-term gratification dominates. In July 2021, the South African Reserve Bank reported that households were spending three quarters of their take home pay on debt. The need to budget and save has become even more critical over the past two years as many people lost their jobs or income during the harsh lockdown of 2020, and it is important that we take control of our finances to secure a better future for ourselves and those who depend on us.
Life insurance and savings are part of your financial plan for the future
When you think about your savings plan, life insurance probably isn’t the first thing you associate with saving for what’s important to you. Most people see life insurance as a grudge purchase, something you only benefit from if something bad happens to you, or even worse, if you die.
It’s important to have both life insurance and a savings plan because each protects your future in different ways. Life insurance is necessary to protect you and your loved ones if something happens to you and you can no longer support the family, while savings are essential to help you prepare for expenses. such as an emergency vehicle repair, fund larger future needs such as your retirement and keep your debts to a minimum.
At first glance, life insurance doesn’t seem to have much to do with the financial goals you set for yourself. But it’s important to think of life insurance, disability and critical illness insurance, and your savings as important vehicles that work hand in hand.
Be sure to structure your insurance coverage effectively so you have more money to save
Your life insurance policy should be structured to manage your premiums as efficiently as possible, paying as little as possible for adequate life coverage, so that you have additional amounts to supplement your savings. Getting adequate coverage is essential to ensure that you don’t pay too much for coverage that you don’t need and for a period of time that you don’t need that coverage.
A good example of overpaying for insurance is coverage that would pay to care for your children if you were to die. You only need this cover until they become financially independent, so you should never buy lifelong cover to cover this need, as you will pay for the cover after the period the need ends. Plus, because coverage duration is one of the factors insurers consider when pricing coverage, you’ll pay more from the first premium for coverage that’s expected to last longer.
Evaluate your portfolio regularly
It is important to set up regular meetings with your financial advisor to reassess your financial portfolio and make changes if necessary. For example, you may have purchased life insurance a few years ago to repay your bond in the event of disability or death. However, you recently received an inheritance and have since used that money to pay back your bond. Since you no longer need this coverage for your bond, it’s a good idea to move this coverage to an area of your policy where you may be underinsured, or transfer this amount to a savings vehicle. like your retirement policies.
Be aware that a critical illness or disability can drain your savings
Critical illnesses have an important link with savings. For example, you could become disabled in a car accident and have to make several modifications to your home, such as railings and modifications to your bathroom and kitchen. If you don’t have cover in place for this, the money will have to come from somewhere and, unfortunately, that will mean digging into savings. A small emergency fund won’t be enough to pay for the significant extra expenses that could arise from a serious illness or injury, so it’s a good idea to make sure you have critical illness coverage on your life insurance policy.
A financial advisor can help you
Insurance products can be quite complicated. Making the wrong decision can have serious consequences for you and your family, so it’s worth shopping around for the best advice. Fortunately, there are plenty of qualified financial advisors who can answer your questions, provide clear explanations, and help you understand what life insurance you’re buying. Financial advisers must meet strict regulatory requirements and be duly licensed by the Financial Sector Conduct Authority (FSCA) and product providers.
If you’ve been thinking about your savings and how best to plan for your financial future, there’s no better time than the present to act. Look online for recommendations for financial advisors or ask people you know who they trust with their financial matters. Start your savings plan today – your future self will thank you.