/ 6 July 2011

Life insurance vs savings

Paul asks: The vexing question of whether it is worth taking out life insurance or investing the same amount of money into property has been raised in our house again.

I am 63 and still writing to earn my living but there is never any money left over at the end of the month to clear our debt. We have already put our first child through school and university; we still have one child at university and one child in high school in grade 10. I have paid R4 670 a month to Momentum myriad for the past three years.

Maya replies: I am a strong believer in insurance simply because I have seen too many people left destitute when something happens to the main breadwinner or where people are disabled.

However, one needs to look at the need for insurance holistically and balance your spend on financial services between savings and insurance.

When you are young, your biggest asset is future income, so it is important to have that insured. As you get older you have less income generating years ahead of you and your biggest asset moves from being your future income to being your retirement savings.

In an ideal world you want to be have enough insurance and a healthy retirement fund, but if you are falling further into debt and unable to build up savings at this critical stage of your life, then in terms of the best allocation of ‘limited resources” (to use an economic term) it would make sense to divert some of that insurance premium towards settling debt and saving.

Although you will be taking a risk, it is less of a risk than not having sufficient retirement funds. Probability-wise there is a higher chance you will live to 80 than die today.

It is important to have some basic life cover, so look at your current needs. Your children are nearly financially independent so decide how much you would need to support them on a basic level for the next three or four years if something happened to you.

Your bank will probably insist on some life insurance for your mortgage, but find out first if you don’t already have insurance through the bank — there is no benefit in being over-insured.

I would recommend you sit down with a good financial adviser who will look at your finances holistically. They can also give you some ideas of where to save.

You mention property, but it could also make sense to increase your retirement contributions to benefit from the tax-free deduction.

This is a discussion you should have with the family — children included, as it affects them too. I am not sure of your financial arrangement with your children but they can take up part-time jobs to supplement their studies. We all want to provide the best for our children, but it cannot be at the complete sacrifice of your future (unless they are prepared to have you live with them one day!).

Set financial goals that you want to achieve in the next five and ten years. Don’t just focus on paying off your bond; also start building up those savings. The next ten years are critical in ensuring you have some cushion in retirement.

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