Job losses are now common occurrence in our country. Even big and well established companies such as Telkom, the Development Bank of SA and banks are shedding jobs. The only people who are safe from retrenchments are those in essential services such as teachers, nurses, doctors, police, etc… The rest of us do not have job security. So as we plan our lives, we always have to bear in mind what would happen if we were to lose our jobs. When we buy savings and investment products, we must also check what protection, if any, is there if we were to lose our jobs.

Sbu’s story

*Sbu is a good saver. Between his life cover, retirement annuity, endowments and unit trusts, he puts away R6500 monthly. All went well for him until he was retrenched in December 2013. The companies that he had policies and investments with are writing to him regularly asking for premiums and advising him to cash his investments. This would be a big loss for him  as they would charge him surrender / early withdrawal penalties on endowment policies and life cover as an example. Surrender values are also very low. He obviously doesn’t want to cash in. He is frantically looking for a job so he doesn’t have to cash his policies & investments and have to start over again when he gets a job. When I spoke to him, he told me that he is no longer opening his post as it was too frustrating for him. I told him to contact his financial advisor. Sadly, he doesn’t have any relationship with the people that sold him the policies and investments. So I told him to open the letters and read them and call the people who are writing to him to discuss his options.

Just imagine what would happen if Sbu were to die at this time, his policies would not pay out as he is in arrears yet he has been paying premiums for  years. What could Sbu have done to save himself from this stress?

How can we soften the blow of retrenchment?

  1. Unless you are in a secure job, avoid products that tie you to a fixed term e.g. 5 – year endowments. Ask yourself what you would do if you were to lose your job during the course of your endowment. Would you still be able to pay the premiums? Is there any premium waiver? If you won’t be able to pay the premiums in the event of a job loss and there is no premium waiver, then find out what penalties you are likely to be charged if you stop paying premiums. You don’t want to have to pay penalties at a time when you desperately need money.
  2. Whenever you take out policies, ask if the policy has retrenchment cover. Retrenchment cover would normally give you a 12 month breather so you don’t have to worry about paying premiums while you are still looking for a job.
  3. If you are likely to need money in the event of you getting retrenched, then your best bet is to take investments that do not tie you to any fixed term e.g unit trusts or exchange traded funds. You can cash unit trusts and get your money within days
  4. Use your retrenchment payout to pay your premiums for the next 12 months or even longer. This would give you some relief as you don’t have to deal with the stress of the possibility of losing your savings and investments. You want to keep your life cover in place when you lose a job as your health may have deteriorated over time. A new policy is most likely to be subject to underwriting and might cost you more in premiums, if you still qualify
  5. Try and find a financial advisor that you trust and you can have a long-term relationship with. Your advisor should check with you at the time of investing whether you are in safe job or not and also talk to you about possible protection in the event of loss of income
  6. All of us should have what I refer to as a “money pot”. You must put money in your money pot monthly and increase your monthly contributions to your money pot at least yearly. You must only withdraw money from your money pot for essentials and for unexpected events. The best place to invest money in your money pot is in unit trusts. While you are looking for another job, you can use money in your money pot to pay your premiums

*Sbu is not his real name

DID you know?

On an endowment policy, you could be charged a penalty equivalent to 15% of your investment value when you stop paying premiums.

How to choose the right investment vehicle for yourself

However, choosing the right investment for you is not just about the penalties in case you can no longer afford to pay premiums. Some of the other considerations are:

  1. How disciplined you are as a saver
  2. The amount you can afford to save – this affects the fees you would be charged
  3. Your income tax rate & how the investment you choose is taxed
  4. Your risk appetite
  5. Your investment objective
  6. Your investment term
  7. Your desired rate of return
  8. The liquidity of your investment vehicle
  9. The fees you are willing to pay. Good advice comes at a cost, etc…

Refer to page 123 to 125 of the book From Debt to Riches on some of the considerations if you want to take out life cover.

So make sure that you consider the above before choosing the right investment for you. Please contact your financial advisor if you need clarity on any of the above or to check if you have any protection in the event of retrenchment.

Do you need help saving for retirement, school fees and university fees for your children, a deposit for your car or home or to build your own money pot? Drop me an email on phumelele@thuthuka-sa.co.za

Debt to Riches cover

Best regards 

Phume