Tumi has life cover for her bond, but doesn’t have any other kind of risk cover, which could spell disaster for her family, should she become disabled or die. As combined breadwinner, Tumi shares the responsibility to secure her family’s financial independence with her husband. She must therefore ensure that she, like her husband, is covered against life’s major risks and unforeseen events. These include the possibility of an untimely death, disability due to any kind of accident, or being diagnosed with a serious illness — for instance, breast cancer.
While Tumi would probably prefer to spend her hard-earned money on a few pairs of beautiful shoes, risk cover may be the best buy she can ever make.
Tumi should ask herself these simple questions: ‘What will happen to my husband and daughter if something traumatic happens to me that makes me unable to work again and therefore unable to earn any income? What about the cost of my medical care? What about my outstanding debt like my car repayments or credit card? Will my husband be able to pay for our daughter’s education? Does he earn enough to take care of all these things?”
In addition to cover in the event of death, risk cover could also include the following:
– Disability cover will insure Tumi against accidents or illnesses that may leave her permanently unable to continue working. Disability cover ensures that money is available, not only to compensate for Tumi’s loss of income, but also to help with the medical costs associated with disability.
– Dread disease cover is a more specialised product that will insure Tumi against a range of serious illnesses, such as breast cancer, a heart attack or a stroke. The dread disease benefit will be paid out once a person is diagnosed with one of these or several other illnesses.
– Accident cover will insure Tumi against the consequences of a serious accident or any other violent happening where she might, for instance, lose her vision, a limb or even her life. Since a large percentage of deaths or disability at younger ages result from accidents, it is a relatively cheap way to increase your cover.
Here are a few reasons why life assurance should be an important part of Tumi’s financial plan:
– Cost of living for her family. A life assurance policy pays out on death. This means that, should she die, Tumi’s husband will not have to start wondering where the money will come from to help him provide for their daughter.
– Her daughter’s education. Providing for her child’s education after her death is probably the best present Tumi could leave her. A savings policy which also pays out on death or disability can help her ensure that.
– Debt. A life assurance policy can cover Tumi’s debt after she dies and ensure that her family starts the new life without her — debt free.
– Funeral expenses. These days, it costs a lot of money to die — there may be expensive bills to pay to give Tumi a worthy funeral.
– The amount of life assurance Tumi needs should provide her family with a similar income as they enjoyed on her salary. But how will she afford the monthly premiums?
If Tumi buys only one pair of shoes less per month she can use R300 to obtain risk and life cover as well as a savings policy for her daughter’s education. For example, she will pay a monthly premium of R150,32 for a policy which will provide her with R330 000 on death or disability or diagnosis of a dread disease. She can also pay a monthly premium of R150 for an education policy to provide for her daughter’s tertiary studies. This policy will, for example, in 15 years time pay out R102 800 in a high inflation scenario and R69 300 in a low inflation scenario. These solutions are for illustration purposes only and are unique to Tumi’s situation and her circumstances.
Update on Tumi’s financial situation: on the back of budgeting advice last month, Tumi has cut back on her entertainment and clothing expenses by R800. She is also monitoring her cellphone calls more vigilantly and has saved R270 on her cellphone bill. As advised she is using the extra R170 to increase her repayments on her credit card and store cards, which will be paid off by May, at which stage she will have R670 extra cash in her pocket to invest. Tumi also re-negotiated her bond rate for a 50 basis point cut and now pays 1,75% below prime. But the saving has simply offset the increase in the interest rates. Next month Tumi will be receiving her bonus and wants some advice on how to spoil herself a little while also saving
Tumi’s original financial situation
Income:
Tumi’s take-home pay is R11 200
Bond:
Bond value: R600 000
Tumi and her husband each pay R3 000 into their bond
Short-term debt:
Tumi owes R5 000 on her credit card. She just pays the minimum requirement of R500 a month.
Tumi owes R5 000 on store cards
Car finance: R2 000 a month
Expenses:
Debt repayments: R6 000
Cellphone: R600
Groceries: R1 000
Household bills: R500
Entertainment — Tumi eats out twice a week: R1 000
Clothes — R1 000. Tumi loves shoes
Crèche: R1 000
Petrol: R1 000
Tumi spends R900 more than she earns