Life insurance is a powerful financial tool, but it must serve the policyholder’s needs and align with their financial reality.
Life insurance is an essential financial planning tool, providing peace of mind and financial security to loved ones. However, circumstances change, and what once seemed like a prudent decision can become an overwhelming financial burden.
This is the reality for a 73-year-old widowed retiree who is battling to maintain R12 million in life cover due to soaring premiums.
The situation
This gentleman, a dedicated father of three daughters, originally took out life insurance to ensure their financial security. However, the monthly premium has since risen to nearly R30,000, now making it the most significant part of his monthly expenses. With limited assets and a fixed retirement income, maintaining this policy is no longer viable. He now faces a critical question: what are his options?
Key considerations
Before making any decisions, it is vital that he evaluates the following:
- The purpose of the cover: Was the life insurance intended to cover estate duties, provide for his dependants, or leave a legacy? Understanding its original intent will help guide his decision.
- Affordability: With premiums consuming a significant portion of his budget, does continuing with this level of cover align with his current financial priorities?
- Health and insurability: At 73, his options for new cover are limited, but understanding his health status can guide adjustments to the existing policy.
- Beneficiaries’ needs: Are his daughters financially independent or do they still rely on him? Knowing their current and future needs is crucial.
Options to consider
Reduce the cover amount
Most life insurance policies allow the insured to reduce the sum assured. By scaling down the cover to a more manageable level, such as R5 million or even R3 million, the premiums can be significantly lowered. This approach will ensure that some level of protection remains for his daughters while alleviating financial pressure.
Switch to a cheaper policy
Depending on his health, it might be worth exploring more cost-effective alternatives, such as:
- Guaranteed whole life policies with fixed premiums.
- Term life insurance for a limited number of years if his daughters are financially stable.
However, at his age, it is highly unlikely that a more affordable option would be available.
Convert to paid-up status
If the policy has accumulated cash or surrender value, converting it to a paid-up policy might be possible. This option eliminates future premiums while retaining a reduced level of cover.
Use other assets to cover estate costs
If the primary purpose of the policy is estate liquidity, he can consider alternative strategies, such as selling or leveraging assets.
Seed the policy to his daughters
Another option is to transfer ownership of the policy to his three daughters, who can take over the payment of the premiums. Depending on his health status, it may be beneficial to keep the policy in existence. This approach will allow the daughters to preserve the intended financial benefit while sharing the cost among themselves.
Cancel the policy
Although drastic, cancelling the policy entirely may be necessary if premiums are unsustainable. This option should be a last resort and pursued only after all other options have been thoroughly explored.
Discuss with the family
Transparent communication with his daughters is crucial. They may prefer that he cancel or reduce the policy instead of putting further pressure on his retirement finances.
Seek professional advice
Navigating such a significant decision requires professional guidance. A certified financial planner can:
- Assess the retiree’s current financial situation;
- Analyse the policy’s terms and conditions; and
- Propose strategies to balance affordability with the retiree’s goals.
Final thoughts
Life insurance is a powerful financial tool, but it must serve the policyholder’s needs and align with their financial reality. For this retiree, taking proactive steps now can ensure his financial stability while still considering his daughters’ future. By exploring the options outlined above, he can regain control over his budget and make informed decisions that reflect his current priorities and legacy aspirations.
Article by Hardi Swart – Family Wealth Custodians