/ 29 July 2011

Saving with insurance

Saving With Insurance

Households should save up cash for unforeseen emergencies.

The experts recommend keeping between three-and six months’ salary ‘available’ at all times. This is a tough task as more and more households struggle with the cost of day to day living.

It is almost impossible for the average family to stockpile additional cash when food, fuel and administered prices increase at rates well in excess of official inflation. And low income earners will find six months’ wages wholly inadequate to cover the financial emergencies they typically face.

A sensible alternative to stockpiling cash is to view insurance products as a form of ‘forced’ saving. There is no better way to illustrate the benefit of insurance than to consider the most popular form of cover sold in South Africa.

Funeral cover is popular because of the massive cost to low-income households of holding a funeral. A family getting by on social grants or a minimum wage cannot conjure up the R5 000 or R10 000 for even the most basic service.

There are a number of financial services providers issuing funeral policies in the domestic market. Although the costs and benefits vary from provider to provider, most low-income funeral covers are comparable. Depending on the insured’s requirements, these covers can be purchased from as little as R29 per month.

An individual saving R30 per month in a savings account that pays 6% per annum interest needs 10-years to save R5 000. The funeral policy will pay the R5 000 even if the policyholder has paid only one or two premiums. In 2007 the Association of Savings and Investments South Africa (Asisa), in collaboration with its member life insurers, announced a set of standards for low-income insurance products.

Known as Zimele, these standards guide how insurers design, market and administer funeral insurance (whether member only, family or parent cover products), credit life policies, life cover and physical impairment cover. The overarching goal is to provide fair charges, easy access and decent terms. Entry-level funeral products are designed for the difficult financial realities facing consumers. Low premiums are just the beginning.

Zimele products now offer premium holidays which see the cover remain intact despite missed premiums (subject to conditions). And companies offer a range of ‘add on’ benefits too.

Transport to funeral homes, trauma assistance, treatment in the event of assault, HIV treatment, legal support, health advice and emergency medical response are just some examples. As we move up the income ladder the mix of risk insurance changes. Because higher wage earners can cover smaller expenses using bank accounts or credit facilities, their life insurance purchases centre on life and disability covers.

The mix of life products varies significantly at different life stages. “Managing your life portfolio is a dynamic process and you should be meeting with your financial intermediary annually, or at the very least every second year,” says Craig Harding, managing director of Altrisk.

Lifechanging events such as marriage, the birth of a child, property ownership, a career change, divorce, serious illness and retirement all have an impact on your risk profile. The insurance consumer has to balance their available budget against personal factors such as lifestyle, dependents, outstanding debts, health conditions, employment and heredity factors.

A young graduate professional who has just started working, rents a townhouse and has no dependents will not be purchasing the same risk covers as a married man with two children and a mortgaged home. “Life cover is not an absolute requisite for the graduate professional,” says Rafieq Saville of Professional Financial Solutions. “This person has no dependents and no major outstanding debt in the form of a bond.”

The priority cover in this case will be disability cover, including a lump sum to cover immediate expenses and an income replacement benefit to cover salaries should the insured take ill or be involved in an accident resulting in being off work for an extended period of time, or even permanently.

“Life cover becomes an absolute must for the family man,” continues Saville. “The bank would most likely have required such cover as security at bond application stage.” If both husband and wife work then it makes sense for each to take life cover to pay off any outstanding debts as well as provide financial support for their family should either of them die prematurely.

In terms of critical illness, disability and income protection covers, the couple must make sure their benefit amounts are adjusted for higher family cost of living. “When it comes to your financial planning, there are three indisputable realities you must consider: You are either going to live too long, die too soon or get sick in between, quips Harding. He concludes by urging savers to consult experienced, professional brokers to assist them in assessing their risk portfolios.

Purchasing insurance for your personal assets is another important form of saving. Because it is extremely difficult to save up enough funds to cover the expense associated with a motor vehicle accident, house fire or other disaster, some form of personal lines cover (short-term insurance) is essential.

A sensible personal lines policy includes your moveable assets (car and household contents) and immovable assets (your house). Short-term insurance statistics confirm that motor vehicle claims account for the bulk of insurance companies’ annual payouts.

In a country with 10 000 fatal car accidents and approximately 80 000 vehicle thefts each year, ‘protecting’ your motor vehicle is critical, even more so when there is money owing on the vehicle. No amount of saving will compensate for losing your motor vehicle to accident or theft and still having to honour the hire purchase agreement.

July 2011 National Savings month serves as a reminder to us all to review our financial plans and afford savings the priority it deserves. Whether we save through traditional bank savings products or via the insurance route, each rand we tuck away not only benefits us, but the economy too.