Are there alternatives or supplements to life cover?

Published on 25th November, 2022 at 01:59 pm

Life cover is vital, as it can help safeguard your loved ones from financial hardship if you pass away. However, it isn’t the only financial solution worth considering to ensure your loved ones are cared for. Here we look at how a retirement annuity can bolster your provisions for your loved ones when you are no longer around, and if looking for an alternative to standard life cover, why a death income benefit is worth consideration.

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In this article you’ll learn:

• How life cover can offer financial relief and ensure your loved ones are cared for when you are no longer around.
• How a death income benefit can be an alternative to standard life cover.
• How saving in a second retirement annuity can also help provide for loved ones on your death.

Life cover

Life cover can serve to cover the living costs of your nominated dependants, such as spouse and children, and settle any existing debt. How much your dependants receive depends on how much cover you’ve purchased (the more you need, the more you pay in premiums). “It is, however, important to also provide for estate-related costs upon your death, like executor’s fees and estate duty, as these can reduce the provision to your dependants and can require the forced selling of fixed assets if there is not enough liquidity in your estate. Sanlam has an Estate Expenses benefit that enables you to separately make provision for these costs,” says Karen Bongers, product development actuary at Sanlam Individual Life.

When you take out Sanlam Premier life cover, you can earn Wealth Bonus, Sanlam Group’s monetary reward for long-term wealth. Because Premier risk products are participating Wealth Bonus products, every time you pay a premium, Sanlam contributes to your Wealth Bonus, which eventually unlocks at certain milestones and pays out in cash. Find out more here.

Death income benefit vs. death lump sum benefit

If the purpose of buying life cover is to provide for dependants on your passing, you could consider buying a death income benefit, a death lump sum benefit, or a combination of the two.

A death income benefit pays a specified monthly amount to your nominated beneficiary for a specified period, like R20 000 per month for a period of five years, increasing with inflation. Bongers explains: “One of the biggest advantages of a death income benefit is that it provides you with the peace of mind that provision for dependants will not run out earlier than intended.”

A death lump sum benefit pays a specified once-off amount to a beneficiary. For example, you can purchase a policy that will pay a R1 million lump sum to your nominated beneficiary. “An advantage of a lump sum benefit is that all the provision is provided upfront, with the beneficiary having the flexibility to invest the funds as they see fit,” says Bongers.

Combining the two can also make sense. Taking a death income benefit with a one-year payment period can enable your dependants to not be burdened with the financial responsibility of investing a lump sum during the emotional period shortly after your death. Speak to your financial planner about which benefit or combination of benefits will best meet your particular needs.

Insurance policies can be intimidating if you don’t understand certain jargon. We’ve made it easy to understand with this guide.

Retirement annuity (RA)

Most people consider RAs for retirement, but they have a surprising alternative use. It’s a good product to cover expenses in the event of the main breadwinner passing on. You can nominate beneficiaries per plan at death to allow for each plan to be purposed to pay out to different people with different intentions. An RA is paid as a lump sum to dependants or nominated beneficiaries or to the estate if none are nominated.

We’ve demystified retirement planning jargon here.

“Having multiple RAs is a nice way to stagger retirement planning and create a phased investment strategy. It allows for access to a third in cash on each plan separately and at differing times, as the need for cash lump sums arise,” says Farzana Botha, Manager: Segment Solutions, Retail Affluent and Recurring Savings at Sanlam Personal Finance.

However, there are some drawbacks to an RA. “With the exception of the one third cash lump sum being allowed, the remaining capital must be used to purchase a life or living annuity if the life assured is still alive. On the death of the life insured before retirement the RA is paid as a lump sum to the dependants or beneficiaries,” says Botha.

If you are considering selling your business or property to fund your retirement, think again. Find out why this could have its financial pitfalls here.

You can earn more Wealth Bonus when you save in a Sanlam Cumulus Echo Retirement Plan RA! Wealth Bonus is Sanlam Group’s monetary reward for long-term wealth. Speak to a financial planner today to find out how you can earn more Wealth Bonus. 

Want to maximise your Wealth Bonus? Here’s the ultimate guide.