Are you the earner?

2012-01-21 08:22

Masehume, who is supporting her 44-year-old unemployed sister and her two children, shares a similar experience with many other South Africans and she wants to put a plan in place to provide financial support for her niece and nephew.

“I would like to save R350 each month to provide for the future of my sister’s two children,” says Masehume.

She needs to find a balance between saving for their education and also protecting against unforeseen circumstances. What if something happens to Masehume and she is unable to continue to provide for the children?

There are two options for the savings portion. She can opt for an endowment-type product that has a fixed savings period of 10 years or she can select a unit trust investment with no fixed period.

For example, Old Mutual offers a smoothed bonus product for as little as R100 a month for 10 years; alternatively their Max Investment products have a minimum premium of R250 a month. As these are both endowment policies Masehume could then take out additional premium protection cover.

This cover would mean that the monthly savings continue into the policy if she dies or becomes disabled so the children’s education fund continues.

She could top this up with life cover to pay a lump sum to her sister. She could also opt for retrenchment protection where the premiums will continue to be paid if she is retrenched.

These insurances come at an additional fee so Masehume needs to speak to an adviser about the best allocation of her funds.

While protecting against risks is important, it should not be at the sacrifice of future savings.

Masehume could also save through a unit trust and take out separate life cover that would pay out to her sister and the children if something happened to her. The benefit of a unit trust saving is that there is no fixed period and Masehume can stop the contributions when she chooses. The downside is that typically unit trusts have higher monthly contributions starting at about R300 per month, which leaves her with less money to take out the insurance policy.

Sanlam offers a “bundled” product that provides compulsory funeral and savings for the policyholder, as well as optional cover for family funeral, disability cover, hospital costs and additional savings.

Sanlam Sky Solution’s Masterplan allows for the payment of premiums by a third party on behalf of the policyholder. In other words, Masehume can pay for the policy but her sister would be the beneficiary.

For example, the Masterplan’s Plan?A option has a premium of R105, which includes funeral cover and savings of R25.

Depending on the other types of risk cover required Masehume can then select additional cover such as hospital cover in case any of them are hospitalised, funeral cover for the children and disability cover for her sister. If she took all the cover she would have R100 a month to add to savings.

Masehume needs to decide what cover is the most important and whether some of these risks can be provided for elsewhere.

How does it fit in with her current finances?

In making her decisions Masehume needs to look at her finances in their entirety. As she is currently employed, she most likely has existing life cover through her company.

If Masehume has no other dependants she can opt for this cover to be paid out to her sister and the children if something happens to her. Her employer may also offer funeral cover which she can extend to her sister. If she has additional life cover she can allocate a portion of the payout to her sister.

She can also make the family beneficiaries of her pension fund. If she does not want to leave the money directly to her sister she can select to have it paid into the Guardian Fund administered by the Master of the Court which would then provide for the living expenses of the children.

Although using her existing cover would be a good strategy in the short-term, once she has her own family this would change. Also if Masehume became disabled she would require the company benefits for her own needs.

In conclusion, it would be financially sensible for Masehume to have a dedicated savings and insurance policy that would provide for her sister’s family. An education policy that continued to pay the premiums if something happened to her would be a good start.

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