If this month was your last instalment on your bond, what would you do with the extra cash next month?
Save for retirement? Go on holiday?
Now imagine the opposite – having the bond and no money to pay for it…
Paul takes out a R1 million home loan. At a 10% interest rate that’s around R9, 650 a month, every month for the next 20 years.
Now, like most South Africans, he doesn’t have much disposable income left at the end of the month. In fact, if either Paul or his wife lost their job, they’d be knee deep in the stinky stuff!
So what if Paul was killed or disabled, and his income fell away?
After five years of bond repayments, they’d still owe the bank R900, 000 and unless Paul’s wife can increase her income, she has a cash flow problem.
Of course, life insurance is the solution, but which type?
Option one: term life Insurance
In the good old days, all insurers used to sell a thing called term life insurance. You select a term of, say 20 years, and at the end of that your bond is paid off and the insurance falls away. Generally much more affordable than the whole of life insurance
The problem comes in if you need the insurance for longer than the term. For instance, you might sell that home after 10 years and buy another. What then? Now you need a new life insurance policy. And what if your health had deteriorated in the meantime and you can’t get cover?
Option two: Deceasing term life insurance
With this, the insurance value decreases as the amount owing on the bond decreases. The problem here is the life insurance is structured on an increasing premium pattern – every year the insured amount gets less and less while the cost gets more and more!
Option three: New generation life insurance
Nowadays few insurers offer term insurance since the whole of life has become considerably cheaper. In the good old days, life insurance had ‘fat’ built-in in the form of cash values available if you surrender the policy. This all ended with new generation life insurance.
You have the option of a level cost or a cost which increases by a percentage amount each year. Let’s take a look.
Level cost life insurance:
Here the cost stays the same every single year. The actual cover also stays the same but you can choose to have the cover increase.
Compulsory increase in life insurance:
With this option, the cost increases with a fixed percentage every year. The cover stays the same but you can select to have it increase.
Here’s how I would choose life insurance.
Stay away from the decreasing lien stuff and consider pure risk life insurance.
If I had a short term outlook:
Over the first 8 to 10 years the compulsory cost increase option definitely works out best. Ideal if you have a 10-year bond or where immediate affordability is more important.
If I had a longer outlook:
If you have a 20 or 30-year bond, and affordability is not an issue, then choose the level cost option. If you’re at all curious about what it would cost, and you’re comfortable with a direct life insurer, then click here for a pure risk life insurance quote.
How do you feel about the fact that modern life insurance has no cash value if you stop the policy?
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