Insurance policies

Should You Terminate Life Insurance Policies When Your Good…

To respond: I like to approach financial planning in a focused way, so here are some tips:

  • Investments are made for specific reasons – they have time horizons and investment components that match those time horizons.
  • Risk coverage is there to cover specific risks. It’s not there to make you rich, that’s what your investments are for. If these risks no longer exist, then it is not necessary to have risk coverage.
  • Regularly review any risk cover you have and see if it is still needed. There is no point in paying high premiums to cover a risk that no longer exists. You are better off investing the money than paying for unnecessary coverage.

We have life insurance to cover a risk. These risks would include:

  • Caring for people who depend on you;
  • Ensure that your family’s way of life is maintained if you are no longer there; and
  • Cover any debts you may have.

Since you’ve paid off your home loan, the life coverage that was there to cover that debt is probably no longer needed.

Do you have any new risks?

Before canceling life insurance, check whether you have other risks that could be covered by life insurance. Remember that as you get older, it becomes increasingly difficult to get life insurance, as you will have had a few medical issues over the years.

I recommend that you contact a financial adviser and do a risk assessment. When I do risk assessments for people your age, I find that the need for life cover to cover debts and support minor children has all but disappeared. However, a new need must be covered: that of the costs of closing your estate without having to sell assets.

There are three big costs when closing an estate:

  • Capital gains tax
  • Executor fees
  • Inheritance rights

These numbers can be quite high. If your estate does not contain many liquid investments that can pay these fees and taxes, the executor may have to sell assets, such as property, at a time when it may not be appropriate in the market. If you have life insurance, these costs may be covered by policy proceeds.

I would therefore recommend that, before canceling your life insurance, you have your financial advisor draw up an estate plan in which he draws up a liquidation and distribution account as if you or your spouse had died. This will give you a good idea of ​​the costs that might be incurred. You can then see if these costs could be covered by your current liquid investments. If there is a shortfall, you can determine how much of your life insurance coverage you need to keep.

Life insurance as an inheritance

If there are no more risks to cover, any life insurance payout will add to the value of your estate and provide a legacy for your heirs. It’s something you can consider if you can afford the premiums, and it makes financial sense.

I have come across situations where older retirees were hesitant to waive their life insurance coverage when they were struggling to make ends meet and had no risk to cover. They claim they have been paying for it for so many years and it seems like a waste to give it up. I recommend that they get their children to give them the money to pay the dues. This way, children can get the payment tax-free (after deduction of inheritance tax) and parents don’t waste money on risk cover they don’t actually need.

So, to sum up, life insurance is there to get rid of risk. You need to determine:

  • If there is still a risk; and
  • If there are new risks. DM168

This story first appeared in our weekly newspaper Daily Maverick 168 which is available for R25 from Pick n Pay, Exclusive Books and airport bookstores. To find your nearest retailer, please click on here.