What to consider when it comes to financial planning for a young married couple, specifically life insurance:
With marriage comes both the emotional and the financial responsibility for another person’s well being. Here are some key points to consider when advising couples who are about to get married, or have recently done so:
Discuss your needs and responsibilities
As grim as it might be, it is important to discuss your financial needs and responsibilities in the event of you or your spouse suffering a debilitating illness, injury or death. This will enable you to ensure that your needs are covered in the event of any worst case scenario becoming a reality.
A young couple typically won’t have a significant amount of assets and their insurance cover would generally need to place the emphasis on their income-related needs, such as provision for debt, household expenses and healthcare costs. Although both spouses might be working full time, one partner is likely to earn more than the other, earning a primary income for the household which might be covering car finance or the bond on a new house. There might even be more arbitrary debts, like paying the cost of the wedding reception or honeymoon or study loans. That is why the newlyweds need to consider a policy covering the loss of income in the event of disability, illness or death.
When insuring yourselves against this risk, you could look into various scenarios, such as cover for the period it would take the dependent spouse to recover or reskill to generate new revenue, or the settlement or partial settlement of joint debts or bonds affected by the loss of your primary income.
Remember the need to provide for basic household expenses and healthcare costs exists for life. The decision whether to protect income until retirement age or death will therefore depend on how much provision the couple has made for retirement, a responsibility which does not fall under life insurance.
How flexible is your policy?
A further related issue is the future insurability of the newlyweds. It’s important that a young couple understands that they’re likely to have many more financial obligations in the future – especially when children are concerned. On average, salaried South Africans finance a new car every three years to five years and many new parents will upgrade from their “starter home” to a family home once children arrive. Newlyweds should ensure that they are able to change or buy up cover when their circumstances change.
Given the high levels of debt and growing asset base at the newlywed-stage of marriage, affordability of cover is an important consideration too. It’s important to make sure that affordability isn’t achieved at the expense of future sustainability, since a substantial amount of life cover is structured with a long term view. You could, for example, look into a policy with a last-death option (offered by BrightRock) which allows clients to choose to defer the pay-out – with a premium waiver – of the cover on the death of the first spouse to the death of the surviving spouse. This is a very cost-effective option for couples with affordability constraints.
If you are jointly repaying a bond, do not insure the full bond on both partners, but only the proportion of the bond the affected partner is responsible for repaying. This will prevent overinsurance and unnecessary premium spend by both partners. The savings made through this approach could make provision for cover elsewhere, such as providing an income after an illness or injury that’s temporary, permanent or results in death. However, if you are married in community of property, you might need to ensure that the cover is on both lives, as the debts could be called in on either death.
Two lives, one policy
Insuring both spouses on one policy means they can insure benefits that are tailored to their needs. A recurring benefit could pay out monthly to the surviving spouse in the event of the first spouse’s death. The couple could have the option of conditional, limited-term or life-long payouts. One company even offers the surviving spouse the option to capitalise the stream of recurring pay-outs into a once off lump sum payment.
Funeral and death-related costs: Young couples need to consider increasing their life cover to provide for funeral and death costs, so the surviving partner won’t have to dip into the couple’s developing asset base on their spouse’s death. It’s important that the surviving spouse should be able to access to a portion of the pay-out right away for immediate expenses like funeral costs.
For younger couples, with a smaller asset base, estate duty might not yet be a major concern. At the very least, every couple should have a last will and testament that deals with the disposal of their assets and liabilities after death. Their estate planning must take into consideration the impact of their marital regime on their estate.
With the accrual system, for example, a spouse whose assets have grown by less than their partner’s may have a claim against the deceased spouse’s estate, which could have an impact on bequests to other beneficiaries. Many couples nowadays are waiting until later in life to get married or – due to divorce – are marrying for a second or third time. These individuals may have acquired significant assets over the years, and will need to make specific provision to protect their spouse and beneficiaries against the impact of estate duty.
What about the children?
It is important to determine which spouse is primarily responsible for the financial provision of the children. This responsibility needs to be covered in the event of the spouse suffering a temporary or permanent illness, injury or passing away.
Listing your spouse as a sole beneficiary of your life insurance policy may not be as considerate as you think. Ensure that more than one beneficiary is defined in your policy, especially if more than one financial dependant is involved. Not only will this prevent complications in the event where both you and your spouse die simultaneously, but it could also simplify matters with the division of financial benefits between multiple dependants.
Some setbacks have a domino effect
The couple may also need to invest in dread disease or critical illness cover to make provision for any additional expense needs that may arise from serious illnesses or injuries. Disability cover will provide an income for the ill or injured spouse (and settle debts in the event of being unable to generate an income), but it doesn’t cater for additional expenses like the cost of lifestyle adjustments or shortfalls in medical aid pay-outs. The extent of the couple’s medical aid coverage and their affordability concerns will guide the appropriate level of cover.
Marriage: 3 choices of agreements
There are three distinct marital regimes in South Africa. Couples about to tie the knot need to consider which marital regime is best suited to their financial needs, lifestyle and cultural beliefs:
|Community of property||Out of community of property (no accrual)||Out of community of property, with accrual|
|This is the default marital regime in South Africa. All assets and liabilities owned by the spouses before and during their marriage become part of their joint estate and become their joint property in equal, undivided shares. Spouses require each other’s formal, written consent to acquire any kind of debt or property, or to sell any of the possessions that they jointly own.||If spouses wish to maintain individual ownership of their separate assets and liabilities (before and during their marriage) with no sharing – they must register an antenuptial contract. Under this regime, any debts a spouse takes on and any assets bought by the spouse belong separately to that individual. Spouses can enter into contracts to acquire assets without the other’s permission, and creditors don’t have recourse against a spouse for their marriage partner’s debts. Spouses must specifically exclude the accrual system if they don’t wish it to apply to their marriage.||This is the default option for spouses entering into an antenuptial contract. The accrual system allows limited sharing while maintaining the spouses’ separate ownership of their respective assets and liabilities. Should the marriage dissolve (because of divorce or death), the spouse who has experienced the smaller accrual of wealth and assets during the marriage is entitled to a share of the growth in wealth and assets achieved by the other spouse during the course of the marriage.|
Originally published in RiskSA
Article by BrightRock