One of the great temptations for the hard-pressed consumer is to cancel his or her insurance policy and medical cover. But legislation protects people against this. They cannot cash in their retirement annuities (RAs) until 55, or exit their pension funds or medical aid while they remain employed at the same company. However, the self-employed can cancel their medical aid policies and opt for cheaper hospital cover policies.
Yet in these times you need insurance and medical cover more than ever. Companies with large balance sheets don't need to take out insurance and instead set up "cell captives" for self-insurance. Similarly for individuals - if assets greatly exceed liabilities, they don't need life insurance cover - though life-based investment policies can be useful for tax planning. Such people can take the financial knock if a car gets written off.
However, if your cash flow is barely matching your liabilities, it might be tempting to save R2 000- R3 000/ month by cancelling life and short-term policies.
But, for a start, your financial institution might not allow you to cancel your credit life policy, which covers the balance of your car payments and mortgage. This applies to homeowners' insurance as well. Then, you must consider what would happen if your vehicle were written off and you could not afford to replace it, or if you were to die or become disabled and the income your family depends on dried up.
It is worth talking to a broker to check whether you're paying too much on insurance. He or she can renegotiate your short-term policies and shop around on your behalf. Or you can compare quotes yourself on hippo.co.za. Don't forget that even if you got the best deal on the market from, say, Outsurance, five years ago, it might not be competitive any more. It's tempting for clients of direct insurers not to shop around and stick to their insurers, but this can be a mistake.
Also, you may be able to find a better price for your life cover by shopping around, but be sure you are comparing like with like. If you have an old policy, it might be a universal life one, which is a hybrid of life and investment cover.
Mike Jackson, CEO of the Professional Provident Society (PPS), says people have been talked into surrendering a policy before it matures and buying another life policy because it also offers, say, R1m of cover. "But the new policy often will not be a whole life one, with a fixed premium, but be renewable, and could be subject to much higher premiums five years later," he says. Some PPS policyholders, who are professionals such as accountants and doctors, have given up their surplus rebate accounts with PPS to move to Discovery or Sanlam, which don't offer this kind of profit share.
But it is disastrous to surrender a life policy and not replace the cover immediately. If you were to develop medical problems you might not be able to get life insurance again - or if you could, it would be at a higher cost and with exclusions. For example, the policy might not pay out in the event of a heart attack.
Giving up medical aid in favour of a hospital plan is also shortsighted. Many people get most value from medical aid for the chronic medication benefit - and prescriptions can be almost as ruinous to your wealth as hospital visits. In any case, many hospital plans pay only from the third day, though it is the first two days that are often the most expensive, particularly if you are in intensive care.
Given that insurance cover is a must in tough times, where can you cut? We all know that we need to prune the frills, but there is a case for reviewing your investment policies as well.
Life assurers no longer charge high surrender penalties on endowments and RAs. If the policy has been in force for at least five years, there should not be any surrender penalties at all. It is not advisable to stop contributing to RAs, which are tax deductible, and you cannot access the capital. It is best to keep endowments running, but to take out the interest-free loan option, drawing down capital. After five years you can have as many of these "loans" as you like.
Unit trusts, as the most flexible of investments, are often the first to be traded when people need the money. It is certainly an easier way to raise money than selling the family silver or portraits. But unit trusts are long-term investments; try not to treat them as a piggy bank. And if you buy and sell them too often, you could be treated as a trader.
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