Different types of life insurance.

I often get asked the question: what is the difference between whole of life and term life insurance? There are very important differences that you need to be aware of and how it affects the premium that you pay.

Before we go into the different types, I want to explain the purpose and importance of life insurance. Life insurance is an insurer taking a monthly premium to insure your life. This means that when you die, they will pay out the sum assured indicated on your policy schedule. Most people see this as a grudge purchase as you may pay premiums that increase every year for a long time, and you are not likely to see if it will ever come to the full value. This brings me to the point that the reason you take out life insurance is not for you. It is for the people you care about. Covid-19 highlighted how quickly things can change, and the risk of you dying can change in an instant. It is for that reason, that life insurance plays a valuable foundation of your financial plan. There is no purpose in having a fantastic financial plan creating the future you want for your family, and if you are no longer there, that plan falls flat.

Term life insurance

If you only need insurance for a short period of time, term life insurance may be suitable for your needs. After a period, the life cover will terminate, and you will no longer pay premiums for this. The problem is that after this period, you may not qualify for underwritten life insurance.

Whole of life insurance

If you need your life insurance for a longer period of time, or to make provision for estate costs or assist your family to replace your income when you are no longer there to provide for them, whole of life cover can work in your favour in this instance.

Life insurance should not be viewed as a grudge purchase, but rather part of your financial planning strategy. In most instances, life insurance is probably one of the best returns on your investments, if you structure your insurance correctly.

Want more information?

For more on this topic, you can listen to the eRadio podcast episode 7 here. You can also view the Private Property Podcast where I explain the top three things you need to know about life insurance. You can view that podcast here.

Busting common myths about having a Will.

Your Will forms an important cornerstone of your Estate Plan, but your Will is not your Estate Plan. Your Will is your final instructions on how your assets should be divided when you pass. There are, however, some common myths around Wills.

The first myth, what happens if you die without a Will?

When you die without a Will, your assets will not go to the state. They will be distributed in terms of your family bloodlines in accordance with the Intestate Succession Act. If you are married and have children, they are the first to inherit. Where you do not have a spouse or children, your parents are then considered, and if they are no longer alive, it follows to your brothers and sisters etc. People who were financially dependent on you also have a right against your estate. It is complicated and may cause fighting amongst your family, but the worst part is that an Executor, who is appointed by the government, will administer and divide your assets.

The second myth – You need to have more than a certain amount of assets to have a Will.

This is simply not true as our legislation allows everyone, even if you just own your clothes, to have a Will. Your Will must however comply with certain minimum standards as set out in the Wills Act.
This includes that your Will must be in writing and every page must be signed by you. Your Will also needs to be dated and witnessed by two competent witnesses. A competent witness is anyone over the age of 14 who is of sound mind and who does not inherit in terms of your Will. Please bear in mind that should your Will be disputed, the witnesses may be called to testify in a court of law.

The third myth – The executor decides what happens to your assets. 

The Executor’s role is to ensure that your assets are distributed according to your wishes. The Executor must report to the Master of the High Court. When you pass away, the executor will be appointed by the Master. A letter of Authority will be issued, and the Executor will take control of your assets for the purpose of distributing them in terms of your Will. Once all your assets have been distributed, the Executor needs to submit a liquidation and distribution account to the Master.

It is important that you keep an originally signed Will in a secure place and more importantly let your family know where it is kept. Make sure your Will is current. You can change your Will as often as you want – you do however need to make sure that is properly signed and dated.

If you need advice on drafting your Will, or you require assistance with your estate plan, use the Contact Us button to speak to us for more information.

5 Steps to design your spending plan

The article, Why you do not need a Budget, clearly discussed why you do not need a budget, and we discussed certain types of spending. We encouraged you to rather plan your spending than setting up a budget. Today I am discussing the top 5 tips for designing your spending plan.

As humans, we often downplay things when it comes to our money. A great example of this is the age-old consumerism trick where they advertise something for R 999 because, in our minds, we automatically think that it is less than R 1 000, so it’s cheap, or now I can afford it. We do the same when it comes to planning our spending. We look at the first one or two numbers. So, for instance, if a debit order is R 1 499, we typically say it’s R 1 400, and then we are confused when all our money is gone at the end of the month.

Step 1: Use the data

Most of us swipe or tap our cards for just about everything, including parking. When you design your spending plan, start by using your bank statement from the previous month and slot the figures into the right category. Once you have completed this the hardest part is over. You have started and now you already have some sort of an idea of where your money goes. Do not use the bank statements for abnormal months, like months where you were on leave, where it was an important birthday or something big happened. Remember we are creatures of habit, and starting on a skewed view will only complicate the process further down the line.

Step 2: Create your overall categories.

In Why you do not need a budget, we categorised spending into four categories, namely fixed spending, necessary spending, social spending, and luxury spending. You now need to classify each of your main categories in step 1, into these four categories. Remember to be honest with yourself. There is no point in classifying a spending item as necessary spending when it is not. It will only complicate the process further down the line when you need to make decisions based on your spending.

Step 3: Determine where you need to cut your spending.

Compare your spending to your income. If you are spending more than what you are earning, start by cutting down on your luxury spending. If that is still not sufficient, see if there is any of your social spending that you can cut back on. You want to avoid cutting back on your necessary spending as far as possible since this will have the most impact on your survival.

Step 4: Breaking it down

For luxury and social spending, it is very easy to overspend as it generally happens in the spur of the moment. By breaking these expenses down into smaller pieces, like weekly units, you will be able to create a control mechanism for yourself. The difficulty in this is changing your behaviour. If you have overspent in one week, you need to ensure and commit to yourself that you will spend less the following week. The opposite is also true, where you are underspending one week, does not mean that you have to overspend the next week. The idea is to get you to spend less and save more.

Step 5: Tracking your spending.

Because your fixed spending will not change, that is one area you do not need to track. Your necessary spending will have certain of those expenses that will only occur once a month and therefore you will be able to track that easily. The other expenses, including the necessary expenses that happen more than once a month, for example, your groceries, etc. will have to be measured in weekly or bi-weekly hurdles to ensure that you are keeping track the way you should. The easiest way to ensure that you do it and that you keep yourself accountable is to send yourself a calendar invite to remind you. This will not only help you schedule time in your diary, it will also be a reminder for you to do it.

In conclusion, if you want to be in control of your money, you have to start somewhere and take action. If you do not change your behaviour, you are not able to change the direction to where you want to be heading. Tracking your spending on the items that you are more likely to overspend on, is the simplest and fastest way to start taking control of your finances.

What is a record of advice?

Financial Service Providers must provide you with a record of the advice to detail the advice that they have provided to you. A record of advice is mandatory in terms of the FAIS General Code of Conduct and has a set of minimum requirements.

What is the purpose of a Record of Advice?

The purpose of the record of advice is to have a written record of the advice that you have received and to help you have a summary of why certain products were chosen for your portfolio. When you meet with a financial advisor, you will have to provide them with a mandate of the services you require from them. Ensure that the record of advice reflects that same mandate. For example, if you only approached the financial advisor to help you with your retirement plan or life cover that is a limited mandate. Where you have asked them for a full financial needs analysis, the record of advice should reflect that.

There are many components of financial planning, some more complex than others. As a client, you have the responsibility to ensure that that financial advisor has as much knowledge of your affairs as possible, to provide you with the advice that is most suitable to your needs and the goals that you want to achieve.

The Record of Advice

The first aspect of a record of advice is a brief overview of your circumstances at the time that the financial needs analysis was performed. This will generally include things like your income, where you are in your career, what your goals and financial concerns are. If someone reads this part of the record of advice it should almost contain who you are as a person at that point in time.

The second part must contain the products that were considered before a final selection was made. There are several financial products out there and although many of them have similar features, some might be better in your specific scenario than others, or they could have different pricing structures, which might make you prefer one over the other. This is the reason why financial advisors must consider various products and determine if they are suitable for your needs. Where your financial advisor, only works for a specific company and there were no real other products that they can compare, does not mean this is poor advice, it simply means that they will provide to you will be limited to their scope of the product. In some instances, it might be to your advantage as that they should know that product inside out.

The next part should contain the products that were recommended and implemented. Your financial advisor needs to state clearly why the product was the one most suitable to your needs, what needs it would solve for and what needs it is unable to solve for. There should, at the very least be a list of the features and benefits as well as the consequences of entering the selected financial product(s).

Product Replacements

In the financial services sector, there is a term called “churning”. This means that financial advisors replace existing policies with new ones as soon as the period of commission clawback (usually two years) has been reached. The replacement of one product with another is not always in your best interest and therefore the FSCA has made it compulsory for a Replacement Advice Record to be completed and submitted wherever one product is replaced with another. Some replacement of financial products is warranted, especially where there has been product enhancement or where your circumstances have changed and the product you have no longer meets your needs. The replacement advice record has a prescribed format, and it makes provision for financial advisors to compare the products considering aspects such as the premiums, costs, benefits, exclusions, and waiting periods. The financial advisor also clearly must note why the replacement is more suitable for your needs. As the client, you must ensure that you understand it and that you agree with the reasoning for the replacement before signing the document.

In summary, a financial advisor should always act in the best interest of their client. The 3 is the ultimate document to help both the financial advisor and more importantly, you the client, remember why certain decisions were made, why you have signed up for certain products, and what your situation was at the time. It remains vitally important that, no matter how trusting and fond you are of your financial advisor, you read the documents before you sign them. Make sure that you agree to the contents and lastly, ensure that you get your signed copy from the financial advisor.

The right asset class for your investment term.

The right asset class for your investment term.

Since 2008, the financial world has been in turmoil and this led to distrust in the financial world. The various asset classes have produced returns greater than expected, however most consumers still avoid risks, and it is hurting their financial planning and wealth creation.

Financial Planning has various asset classes that serves different roles in a financial plan. We will consider the short-, medium- and long-term asset classes and why they are the best for your various financial planning goals.

The short term.

Most of your short-term goals, are for a period of one to three years. These goals will require a higher level of commitment so ensure that you achieve this goal, because your only have a short period to rectify any of your deviations from the plan. For this reason, you should therefore consider less riskier investments. For this you would typically consider a bank deposit with a notice period. Banks often offer higher interest rates for accounts that requires notice, as they have a longer, more certain timeframe in which they can use the money for their other operations. You could also, should your goal have a time horizon of longer than a year, consider a money market unit trust fund. They usually have a steady growth rate and regular income distributions. They invest in asset classes like bonds, to help them generate the returns.

Reviewing your short-term portfolio should be done at least every six months so that you can track the progress and make the required changes when you need to, sooner rather than later.

The medium term

In the medium term, typically three to five years, you would need to consider some risk in your portfolio. With these goals you have a bit more time to achieve your goals, and you have the time to correct any deviations from the plan to achieve your goal. You have probably head of diversification, or do not invest all your eggs in one basket. For your medium-term investments, you need to do just that. You need to expose some part of your portfolio to higher risk asset classes, such as listed property and equity, but majority of your funds will still be invested in money markets and bonds. The equity component of a medium-term portfolio will be an equity fund with a lower level of volatility.

Reviewing your medium-term portfolio should be done at once every year, so that you can make changes to ensure that you stay on track to achieve your goal when needed.

The long term.

Your long-term goals usually longer than five years, will need your money to work for you. This means that you need to take some risks, to achieve your goals. The problem is that we are emotional when it comes to our money, and we want to see it grow. With equity exposure to your portfolio, you might experience short term losses and long-term gains, also known as volatility. The key with long term investment having most of your investment exposed to equities, is to remain invested. In 2020, we have seen a significant slump in the market when the initial hard lockdown was announced, however, by the end of 2020, most investments recovered especially where the investors remained invested.

With your long term investments, you should definitely have a professional to assist you and manage your behaviour and ensure that you do not react to the short term losses that will help you provide the long term gains that you require to achieve your goals.

In summary

For short term investments, you should have little risk in your investment portfolio and review at least every six months.

For your medium-term investments, you should have some risk in your investment portfolio, and review at least once a year.

For your longer-term investments, you should have more risk in your investment portfolio, and have a professional to help you manage your emotions and guide you along the way.

Values and their importance when setting your goals.

The term “value” is simply a label for what is important to you as a human being. We are all unique and our values are entrenched within us from the day we are born. Your upbringing will help shape your values, but your values are mostly unique to you. Your beliefs are assumptions that you have made about the world. These beliefs will either help you achieve your goals, or it might be a hindrance to help you achieve these goals.  The sad truth is that many do not ever reach their goals.

When you set the goals that you want to achieve, they need to be somewhat aligned to both your values and beliefs. Aligning your goals to your values will help you realise what is important to you. Your goals should be about what makes you happy and what do you want to achieve.   

The best goals are set in phases.  

Have you ever read an article that said something like “reach your goals in 10 steps?” Or “15 steps to reach your goals”. This is not one of those articles. Your Goal setting can be loads of fun. Seriously. Most people think that it is a serious matter and should be approached in a serious light. Now let us switch off that light. Have fun working on your goals.  The reality is we challenge ourselves only when we start with the fun things in our lives. You can start with writing down the most unattainable goals first.. The most important thing to do is just to start the process. One by one you will eliminate the goals as you go along, but you will also remember the fun you had doing it.

Conflicting goals and values.  

If you set goals that are not aligned with your values, you will frequently be conflicted. This would mean that the things that you value most will take preference and your goal that is contradictory to your values will take a step back or will not be achieved at all. This could lead to you feeling like a failure and discourage you from setting future goas. It can also be said that achieving that goal, will not feel as great as achieving a goal that is linked to your own values are.  

Goals are part of something bigger.  

Sometimes we also need to know, that not all goals come to an end when we achieve them. That is the best part. You can have many small goals to achieve a much larger goal.  Goals form part of the bigger picture and often, goals are just smaller parts of our bigger goals. This places a bigger emphasis on why it is important to go through the process of discovering your values and determine your goals. Your dreams and aspirations are often the core fundamentals of your goals. To make them real to you, consider drawing a picture, like when you were little. It does not have to be an artist drawing, but it will help you make a deeper found connection with yourself, allowing you to simply be you.

What is your motivation?  

To achieve anything in life, you need to have some form of motivation. That motivation can come from inside you, or from external factors. The things you are more likely to succeed in are the things where we are motivated from within. The drivers that get us motivated from within are the things that are important to us, also known as our values.  

Your values and beliefs are at the core of who you are. By delving into and bringing your values and beliefs from something in your unconscious to being mindful about it, will help you will all your future decisions you need to make, including setting your goals.

If you need help discovering your personal values, book your sessions with a professional coach in our store today.

Deciphering a world of Financial Terminology

I often listen to money programs and read articles about money and the one thing that always gets to me is all the jargon. As a client of some financial institution, the documents provided to you are also built on financial jargon. Sometimes, I even must do some research on the acronyms used in documents and proposals to make sense of the information provided to clients.

The problem, for human beings in general, is that we do not like reading documents that we do not understand, or we read them with such a low level of comprehension that we never really understand what is explained to us and what we sign for.

Whilst financial service providers are aiming to make great strides in trying to, as they call it. “plain language” their documents, there is still a lot to be done. As a financial planner and life coach, I have realized that people trust easily, and sometimes the explanations are not always as forthcoming as they should be. It will also lead to you not understanding what you are buying. The problem is when you need a financial product to solve a need, it is then when this creeps up on you and you have no where to turn to.

Introducing the Jargon buster for financial services.

For consumers that follow us on social media, we will be helping you to decipher (to a point) the jargon used in financial documents and schedules. We will weekly post a specific term, its commonly known “alias’ as well as a short explanation. In doing this, we are trying to equip you to read financial documents with a bit more comprehension.

As the great Arnold Glasow said: “An idea not coupled with action will never get any bigger than the brain cell it occupied”, we will also recommend an action for you to take concerning the specific term. Not only will this help you remember the meaning better, but it will also empower you to make better decisions with regards to your money. After all, it is not how much money you have, it’s how you make your money work for you that will help you gain financial control.

We have also created a Jargon Buster dictionary, that will be regularly updated. You can view the Jargon Buster here.

Got a term that you need help with?

Click on the Contact Us page, send us your request and we will add it to our Jargon Buster.