Judy Barnes
Investing is a personal matter, and first impressions are usually inherited from family. When urged, an individual will begin “informing” you. This is a serious subject, requiring a grave countenance and a low voice. Investments constitute solemn stuff, and whatever daddy advised is almost always regarded as gospel.
Investments include savings accounts, unit trusts, direct stock market investment or property. But how do you go about buying insurance policies, should you decide they are best for you?
Whether you should opt for an endowment or a retirement annuity as an avenue of investment is debatable. An endowment pays a lump sum of tax-free money at maturity. A retirement annuity pays out as an income, or the option of one-third cash and an income from the balance. There is an immediate tax saving with contributions paid into an annuity, but income received at the maturity date is taxable.
Retirement annuities have the added advantage of not being able to be attacked by creditors, and remember they pay out only when you are between 55 and 69 years of age, as this is a provision for retirement.
A 20-year-old investing R300 per month into an endowment with optional life cover receives almost R248 000 immediate life cover and, at 60, will be paid out about R2E000 000.
Maturity values of policies are not cast in stone, unlike bank savings accounts, which offer predictable returns. You can calculate exactly what the figure (after tax) will be at maturity. Projections for insurance polices are used as illustrations. Your money is at the mercy of market volatility. You might not receive as much as you hoped for, or as was originally projected (which was only an example, remember); but, on the other hand, you may earn a lot more.
Attempting to work out the spending power of a policy maturing 40 years from now is futile. You cannot compare today’s values with such a long-term projection. The economy is fluctuating all the time for various reasons; and tax laws will change, having a positive or negative impact on any investment. The good news, though, is that legislation has never been retrospective; so a tax-free investment (as in an endowment) will remain that way, if purchased prior to any impending legislative change. Utilising an annual update of 10% or 15% in premiums, will assist as a hedge against inflation.
Tardiness does not reward investors. If you wait until you’re 40, the life cover is worth only R91 000, with retirement funds of R246E000 at 60. If you procrastinate till 50, you will recieve around R38E000 life cover and only R62 000 at 60.
A policy without life cover will have a higher maturity value, as most of the money paid in is going towards the investment. To use the previous example of a 20-year-old making retirement annuity payments of R300 per month until retirement at 60, the difference in eventual payouts could be about R500 000. While this seems appealing, it should always be scrutinised in the light of an individual’s life cover requirements which, at the age of 20, will be a priority before considering extra pension provision.
An individual may purchase many different policies over the years commensurate with incremental earnings. Annuities or endowments maturing at a certain age, if not required immediately, can be extended to a later date. It all depends on individual circumstances, and whether extra funds are needed at the time. Look to the future, by adding an optional joint and survivorship rider to your retirement annuity, so that your partner can benefit from the income in the event of your early demise.
Other riders are also available, such as disability, dread disease and income protection, as long as life cover is attached to the policy.
Navigating the money minefield can be simplified by sound advice from a responsible broker.
Remember, no avenue of investment is superior to another, merely more suitable, given individual needs and preferences.