What I learnt from my first property investment

I fell in love with the idea of investing in property when I was sixteen years old. It all started when my family started watching an Australian reality TV show called The Block. Four couples each renovate one apartment of a subdivided building, and the person who sells their apartment for the most at the end of the season wins. I was hooked. I didn’t miss an episode (and this was before the days of streaming or DSTV catch up). Below is a trailer for a more recent season of the show – I’m pretty sure the season I watched wasn’t quite as cheesy as this one looks.

At sixteen though there was very little I could do about investing in a property (I was still six years away from actually earning a salary). So, in the meantime, I read books on the subject, in anticipation of the day I would be financially ready to make my first purchase. While I did learn a bit from doing this, there are some lessons that can only be learnt from doing it yourself.

About four years ago, I finally took the plunge and bought a small flat together with two other people. We managed to let the flat for two-and-a-bit years, after which we sold it. The experience was quite different to what I was expecting though. In retrospect, some of what we did was wise (more by luck than skill though), while there were a few other things that I would definitely do differently next time.

So if you’re thinking about investing in property for the first time, here is what I learnt from my first property investment

Partner with the right people

This is one of the things that we were lucky to get right. I’m a numbers guy. If there’s a financial projection with risks involved, I can do that. If you need to do calculations involving interest rates and the amortisation of a loan over a period of time, I’m your man.

What I am not, however, is capable of even the most basic home renovation tasks. My crowning achievement in this field was the time I re-wired a plug (under the watchful gaze and instruction of my dad, of course). Our property was not lettable in the state we purchased it in. This not only required us to renovate but to also put together a renovation budget. Fortunately, my first partner was an architect. He was familiar with estimating costs, determining what renovations we should do and negotiating with contractors. My role in the renovations was limited to Instagram posts.

View this post on Instagram

Renovations nearly there @markleslieza

A post shared by Nic Smit (@i_am_the_smit) on

My other partner was a real estate agent. His knowledge of the property market in Durban was invaluable and without him, we wouldn’t have found the right property to invest in.

My point is this; if you have gaps in your experience required to make a successful property investment, a great option is to partner with people who have skills you don’t.

Be on the same page as your partners

While I definitely benefited from the experience that my partners had, we weren’t exactly on the same page with regards to our ultimate goal. My intention was always to hang on to the property for as long as possible. The numbers I had calculated suggested to me that the long term return we would earn would be well worth it. My partners had a different (but not unreasonable) view and ultimately decided that they wanted to sell and realise their gains two years after we had bought the flat.

While in the end I was happy to sell as well, it did dawn on me that we probably should have cleared up what our goal was before starting. Property is not a liquid investment – it can take months or even years to sell and if you’re in a hurry it’s quite likely you will need to accept a low purchase offer. This experience showed me how potentially difficult it could be if some partners want to sell and the rest do not.

Tenants are a risk and managing them can be uncomfortable

As you might have wondered, if I didn’t contribute much to the discovery, purchase and renovation of the flat, what did I do? One of my main responsibilities was managing the tenant. If you’re reading this, you’re probably already aware that tenants are a risk – they might not pay the rent, it’s possible that they might damage your property or refuse to leave once the lease is up, etc. You have to accept this and allow for it when you assess whether you will purchase an investment property, and then do everything you can to manage this risk.

With that being said though, we were actually very lucky with both of our tenants. Both paid on time every month for two years, and they treated the flat with total respect. However, there was one uncomfortable episode where the body corporate claimed that our tenant drove into the fence and broke it. The body corporate wanted us to reimburse them for the damage. Our tenant said that the fence being broken had nothing to do with her and, as you would expect, refused to pay for it.

For someone who hates conflict, this was a difficult two weeks for me. If you are managing a tenant, especially if your property is in a sectional title building, there will be some conflict. Maybe you’re one of those people who loves dealing with people and sorting out problems and this doesn’t worry you. That’s great! For me personally though the next time I invest in a property I will quite happily pay a property management agency to deal with the interpersonal issues as they arise.

download.jpg

Pay for accounting and legal advice

I’m a sucker for proper documentation. I’ve lost count of the number of times at work where having good documentation has saved me a lot of effort, or how much time we’ve wasted when things are not so well recorded.

A property investment requires you to keep proper documentation so that you can assess your investment performance and so that you can report your earnings to Sars. One of the things we got right was to pay for an accountant to draw up our books. Not only were these financial statements incredibly useful in submitting our tax returns, the advice of our accountant was incredibly valuable. In particular, our accountant helped us to determine which of our costs were maintenance related (viewed as an expense to Sars) and which were renovations (viewed as capital expenditure).

We also saw a lawyer who helped us draw up our partnership agreement. He asked us all the right questions we needed to answer before we entered into a partnership.

These professional services aren’t free, but they are worth every cent.

Be patient, wait for the right property

FOMO is not limited just to social events – it is very possible to get FOMO when considering investments. Be honest with yourself: when the price of Bitcoin last year was rocketing upwards, did you feel a twinge of impulse to get in? I know I did, and I’m a fairly devout Bitcoin-skeptic.

An investment in property can bring out the same emotions. After we decided we wanted to partner in a property investment, we viewed what felt like dozens of properties. All that I wanted to do was get started, but we couldn’t find a property that we all agreed on. What that meant was that once we found the property we eventually bought, we knew it was the one. The asking price was so attractive that it provided a wide margin of safety. What that meant was that the stars didn’t need to align for us to make a decent return – we had some margin for stuff to go wrong and still make a satisfactory profit.

There will always be properties for sale, they won’t suddenly disappear. Be patient and wait for the one that your numbers can justify – without having to make unreasonable assumptions.

In conclusion 

If you’re interested in buying a property as an investment there’s nothing wrong with reading as much as you can get your hands on. But there’s always something new you’ll learn when you actually do it for the first time. If you’re planning on taking the plunge for the first time I hope you don’t have to learn too many tough lessons!

Advertisements

Why I don’t insure my cellphone

When you think about it, cellphones are capable of some incredible tasks. The device that you’re probably reading this on allows you to share your thoughts and experiences with anyone in the world, to access the answer to almost any question, and (my personal favourite) to arrange for a pizza to be delivered to wherever you happen to be.

On the flip side though, they are pretty terrible at keeping their screen intact when dropped, not getting stolen or continuing to work after you’ve spilt water on them. This is why I’ve had cellphone insurance for as long as I can remember. However, my thinking changed this year and I ended up removing my cellphone from my short term insurance policy.

My change of heart around cellphone insurance is part of a larger rethink I have gone through around insurance. Not only do I no longer insure my cellphone, I choose not to insure my Kindle, my GoPro or my Nintendo Switch. I also decline the option to insure my DSTV decoder, and I have no interest in buying scratch and dent insurance for my car or insurance for my tyres. Finally, I have also chosen to increase the excess on my car and my wife’s car to R10,000.

I have decided not to insure small(er) risks. My personal definition of small risks is anything that would cost me up to R10,000 to fix or replace.

Why though? Isn’t this a fairly risky decision – especially coming from someone who works in insurance? 

It’s important to remember why we purchase insurance. Insurance protects us from big risks that could result in us or our family facing financial ruin. That’s why it’s important to have life insurance for your dependants, to have medical aid, to insure your car and to have insurance that would pay out if you were no longer able to work. These are the kind of events that could result in financial ruin. Compare these events to having to replace your cellphone because it was stolen. While the cost of replacing a cellphone might make your eyes water, it’s not in the same league as the bigger risks listed above.

My wife and I have made a deliberate decision to make sure that we have insurance for all of the risks that could ruin us. For smaller risks that may be unpleasant but we could otherwise get through if we had a plan in place, we consciously choose not to buy insurance – we self-insure these risks.

How you choose to spend your finite monthly earnings is ultimately a decision around trade-offs. By not purchasing cover for smaller risks:

  1. I am able to afford insurance for the big risks. I am definitely biased because of where I work, but the impact on me if I am unable to work and earn an income because of a disability is far, far greater than the impact of having my cellphone stolen. If I can only afford one, and I have to choose between insuring my income against disability and my cellphone, I will always choose to insure my income.
  2. I am able to save and invest more. Every rand I save on not purchasing insurance for smaller risks is a rand I can save or invest for the future. It’s important to remember that insurance is around transferring risks to an insurer – insurance is not an investment. Because an insurer has to price an insurance policy to cover the cost of claims, as well as to cover their expenses and make a profit, insurers expect to collect more in premiums than they pay in benefits, on average. This isn’t a problem if the risk you are insuring is too big for you to bear on your own. However, if the risk is small enough for you to self-insure, then insurance can represent a poor allocation of your finite earnings.

At this moment it’s important to point out that your own definition of what constitutes a small risk is entirely linked to your own personal circumstances and preferences. Your cut off point for small risks may be well in excess of R10,000, or it may be much lower.

Also, if you decide to self-insure a certain risk, you must have a plan in place to manage the risk of that event happening. An emergency fund, held in cash that you can access within 24 hours, is essential in protecting you against small risks. You effectively have to behave like an insurer if you choose to self-insure risks, by holding a cash reserve against the risk of these events. Some of the money you save could be transferred into your emergency fund.

I’d like to end with a practical example that I hope will illustrate the points I’ve tried to make above:

  • We were paying R1652 per month to insure my wife’s and my car with an excess of R3,500.
  • When we increased the excess to R10,000, the monthly premium dropped to R1,220. This is a saving of R432 every month (or 26%)

After 15 months, the premium saved would total R6,480, which is just less than the increase in our excess. If the savings were transferred to our emergency fund every month, we would fairly quickly have saved up enough money to fund the increased excess that would apply if we were in an accident or if one of our cars was stolen.

The three biggest financial mistakes that I made in my twenties

The three biggest financial mistakes that I made in my twenties

2016 is not a year that humanity will look back on fondly. Between Brexit, the death of Prince and Muhammad Ali, the US elections and Harambe, it’s probably fair to say that there was more than enough to complain about during last year. On a personal level though 2016 was a fairly good year for me – I got married, was part of a successful year at FMI where I work, and I turned 30.

For someone who considers themselves fresh out of high school, turning 30 felt like a massive milestone. I couldn’t help but look back at my twenties and evaluate how they went. While I had a lot to be happy about, my biggest regrets were around some of my past financial decisions. The reason they are my biggest regrets is that I would be in a significantly better financial position today had I made better decisions.

So for those of you who haven’t turned 30 yet, I have summarised what I believe were the three biggest financial mistakes I made in my twenties. And if your twenties are in your past, I believe these are still pretty big mistakes to make at any age.

Mistake number 1 – Bought property stupidly

In South Africa, it is considered blasphemous to say that buying the property you live in isn’t automatically a good idea. A few years back I did some back-of-the-envelope calculations comparing buying and renting a property and I wrote this. While it might sound like I’m anti purchasing your home, I do believe that in the right circumstances it can be an excellent decision. In 2012 I bought my first property; the only problem is that the circumstances were all wrong.

When I walked into my first property I fell in love with it. High ceilings, beautiful floors and a garden with a pool – it was perfect. The asking price was pretty much the most the bank was willing to lend me, so I bought it.

Five years on and I had definitely fallen out of love with it. Between the high bond repayments, the rates and levies and the cost of keeping a pool blue, the monthly cost of owning a property was eye-wateringly high. An honest review of these costs with my then-fiancé confirmed that if we lived somewhere cheaper we would be much more comfortable financially. So we made the decision to sell and move somewhere cheaper.

But property is a good investment right? Surely it was worth more five years after I had bought it? Unfortunately not. What I paid for my property, plus the cost of alterations I made, was considerably less than what I managed to sell it for after living there for five years. Adjusting for inflation the return on my investment was even worse. Finally, when you consider the transactional costs of buying or selling a property (commission, transfer duty and lawyer’s fees) I want to kick myself over the amount of money I wasted.

If I had bought a more modest home all those years back, less of my salary would have gone towards financing and maintaining that property – I could have saved more money every month (see mistake number 3). If the value of my (smaller) property hadn’t increased, I would have been much less exposed to a less expensive property.

If I could say one thing to twenty-year-old me it would be this: the maximum amount a bank is willing to lend you to finance a property is not a target. Don’t allow yourself to be swayed by how a property makes you feel; let the numbers decide for you.

Mistake number 2 – Didn’t budget (at all – not one cent)

While mistake number 1 had the biggest financial impact on me today, mistake number 2 is definitely the stupidest. Up until about two years ago, I never budgeted at all. I had no idea where any of my money went every month. My only saving grace was that I had set up an automatic monthly transfer of part of my salary to a money market account.

The biggest problem about not budgeting is that you aren’t aware about how much of your money you are wasting. When I eventually went through my expenses, I was shocked into action. Budgeting made me more disciplined with my money and helped me put into place strategies to waste less.

The most blatant waste of money was around food. While I was a bachelor I rarely cooked. Breakfast every morning was whatever I could get from Vida café, I would go out for lunch every day, and dinner was takeaways or a meal from Woolworths. I estimate that the cost of this diet was around R100,000 more than what it would have cost to have just bought my food and cooked myself. That’s an incredible about of money to spend on convenience. The week after I worked this out from my budget I was shopping every week at Pick ‘n Pay and following a disciplined routine of home-cooked meals. I don’t think I would have made this change if not for seeing the results of my first budget.

I’m a bit of a control freak, so I go through every transaction from my account and assign them to different expenses. If that sounds like hard work, you should definitely check out 22seven. It links to your account and does a fairly good job of categorising and displaying your expenses.

Mistake number 3 – Didn’t save enough

You don’t have to look too far to find a report lamenting the poor savings culture of South Africans. While it’s understandable that many South Africans just cannot save because they live hand-to-mouth, I still believe that one of the biggest obstacles to saving is a question of your attitude towards putting money away.

Yes, it is difficult to save money in your twenties. It’s likely to be the time of your life when you’ll be earning the least, and any money you want to save has to compete with the cost of experiences that we want to have. But even if you feel like you’re not saving much in your twenties, it is important that you save something.

Why? Because one of the most important aspects of investing (and one of the easiest for you to control) is how long you are invested for. The money you invest in your twenties is the money that will probably stay invested for the longest, which will be most impacted by the power of compound interest. This powerful example is commonly used to illustrate how someone who starts saving earlier and then stops can end up with a much larger investment than someone who starts later and invests for a much longer time.

While I did save some money in my twenties, I know I could’ve saved more. I also don’t think that saving money requires you to deny yourself of everything you want. Looking back I believe that you need to choose what are the one or two things that make you the most happy, and what else is just a nice to have. While I would always like more fashionable clothes, a faster car or more expensive furniture, what makes me the most happy is going to concerts. If I had spent my disposable income on concerts alone and saved the rest, I probably wouldn’t have been any less happy, and I also would have saved a lot more.

If you’re looking to start saving but just can’t see how it’s possible, I would check out Stash. Every time you spend money Stash will transfer a small amount of your money to your tax free savings account.

So those are my mistakes. While it still irks me that I made them, I have committed myself to making better decisions in the future. I’ve moved to a smaller home, I review my expenses every month against the targets I have set, and I aim to save the most I can every year. Hopefully in ten years’ time when I sit down to write about the financial mistakes I made in my thirties I will have very little to write about!

The OTHER reason that smokers pay more for life insurance

GTY_smoker_jef_130906_16x9_608 (1)

Smoking is an expensive habit. The amount of money a smoker spends on cigarettes over their lifetime can amount to a small fortune. In addition to the cost of cigarettes, smokers also pay more for life insurance.

Today the impact of smoking on your health is well understood. Smoking decreases your life expectancy, as well as increasing the chance that you are disabled or diagnosed with a critical illness. It therefore makes sense that smokers are charged more for life insurance to allow for their increased chance of claiming.

However, there is a second reason that some insurers factor in that makes a smoker’s premium more expensive. It has to do with how long smokers keep their insurance policy before cancelling it. A significant assumption we make when pricing life insurance is around how long we expect to receive premiums on that policy. We incur a significant amount of expenses when a policy commences. This means that the longer we expect a policy to remain active before being cancelled, the cheaper the premium becomes. Some insurers have seen that their smoking policyholders keep their policies for a shorter period than non-smokers. When an insurer factors this into their pricing, it makes the gap between smoker and non-smoker premiums even wider.

You may ask if this is a self-fulfilling prophecy, given that most people cancel their insurance because it is too expensive. If you charge more for smokers because they claim more, should you not expect them to be more likely to cancel their policy because, all things being equal, it is more expensive for them already? We thought so too, but when we compared smokers and non-smokers who paid the same premium as a percentage of their income, we found that smokers still kept their policies for a shorter period on average.

So, why do smokers keep their insurance policies for shorter periods than non-smokers?

There isn’t an agreed answer for this, but some people believe that smokers have an inherently different attitude to risk than non-smokers. Most people who have started smoking in the last few decades started smoking aware of the risks. And yet they still chose to smoke. If smokers are, in general, the kind of people who take more risks, it would mean that they also would place a lower value on insurance – a product designed to reduce risk.

If this was true, it would also suggest that smokers don’t just claim more for insurance because of the impact of smoking on their health. If smokers engage in riskier behaviour in general, this would lead to them being more likely of suffering an injury or illness that would cause an insurance claim, which insurers than price for.

My last point – you may be a smoker and you may feel that you fully value your insurance and that you don’t engage in riskier behaviour than a non-smoker. That’s quite possible. The view above is just a theory, and even if it was true it means that the average smoker has a higher tolerance to risk than the average non-smoker. Unfortunately insurance products are still priced by assigning people into different groups and then treating everyone in the same group in the same way. If an insurer was able to work out how to better predict how long individuals were to keep their insurance policy, it would have a massive impact on how insurance products are priced.

Is life insurance in South Africa ready for assisted suicide?

In the last month there has been considerable focus on the right of those who are terminally ill to end their own lives. A court recently granted a terminally ill man, Robin Stransham-Ford, the right to end his life. He passed away before he was able to undergo assisted suicide, but the decision by the court has a significant impact on how we view the rights of those who are terminally ill to end their own lives.

This week I was asked about the impact this decision would have on life insurance. Having thought through this, I think that life insurance in South Africa is reasonably well set up enough to handle the impact of assisted suicide. Here’s why:

  • Two year exclusion on suicide

This may surprise most South Africans who work outside of insurance, but most underwritten, individual, life insurance policies in South Africa will pay out for deaths as a result of suicide (assisted or otherwise) if the suicide takes place after the first two years of the policy. So anyone who has had one of these life policies for more than two years will not have their life claim declined by the insurer if they choose to undergo assisted suicide.

  • Terminal illness accelerator

So, what happens if I need to undergo assisted suicide in the first two years of my policy? Most life policies also pay out while the life insured is still alive if they are diagnosed with a terminal illness which, in the opinion of the insurer, will result in the insured’s death within the next 12 months. While not all those who would choose assisted suicide would qualify under this definition, it does provide an option for life insurers to pay out before the insured dies. So where the insured chooses to undergo assisted suicide in the first two years of the policy, the terminal illness accelerator may provide them with an option to still claim on their policy.

  •  The impact of underwriting

 The case that now needs to be considered is where the insured chooses assisted suicide in the first two years of the policy that doesn’t qualify as a terminal illness. We need to remember that lives are medically underwritten upfront which means that they have passed some minimum health standard. This reduces the chance of anyone suffering a condition that results in them choosing assisted suicide in the first two years of the policy.

Practically though, I would think the insurer would make some sort of concession if a policyholder underwent assisted suicide in the first two years of a policy as a result of a legitimate health condition. It might be as simple as reducing the benefit pay-out by the premiums that would be owed from the date of death until the second policy anniversary of the policy.

  • Conclusion

I would assume that the above points mean that underwritten life policies are (more or less) set up to allow for assisted suicide. I wouldn’t be surprised to see some insurers introducing policy wording clarity around assisted suicide in the future though.

  • Other concerns

Life cover outside of the individual, underwritten space may have different terms regarding suicide.

Some countries who are grappling with the assisted suicide issue are also considering whether they would allow assisted suicide for those who have purely psychological issues. If they were allowed, I am not sure how insurers would view an assisted suicide as a result of a psychological condition.

 

Why the market for Christmas gifts is inefficient, and an actuary’s opinion on how we can improve it

unnamed

Christmas is upon us yet again. It’s the time of year for resting, eating and spending quality time with family and friends. It’s also the time of year where we brave shopping centres at their absolute busiest to try to purchase gifts for those same loved ones.

Personally, I have always found the process of purchasing gifts at Christmas annoying. Not only because it is quite a frustrating task at my favourite time of year, but mostly because I feel that how we go about purchasing gifts for one another is incredibly inefficient.

There are three main components to this inefficiency:

  • The person buying the gift is not the best placed person to make the decision

The Christmas gift market is massive. It results in billions being spent every year. And the gift beneficiary takes no part in the decision as to what gift to buy. Think about this for a second. If a company invests billions, they will make every effort to ensure that that money is invested as efficiently as possible. Research is done. In depth analysis is done. But when it comes to purchasing gifts, we leave the decision as to what to buy to someone who will always be second best at deciding on the gift. The opinion of the most important person in the gift decision process (the person who will receive the gift) is not taken into account.

  • The gift buying process is time consuming

We’ve all been there. Going to a mall in the build up to Christmas could reduce the Dalai Lama to a total rage. Picture the impossible-to-find parkings, the massive crowds and the long, snaking queues. The crowds at Christmas time can easily double how long it takes to do your shopping.

What about shopping online you say? Well, it is an improvement on physically going shopping. But in South Africa online shopping is not where it should be yet. The range of available items often isn’t as wide as it would be if you visited a shop. You also still need to decide what to buy, which for many is the most time consuming part of the process. And finally, if you’ve left your shopping to a week before Christmas (like I always do), it’s unlikely your gifts will arrive on time.

  • The expenses associated with purchasing gifts are unacceptably high

Think about what the average cost of a gift you purchase is. Say it’s R200. You now need to purchase both a card and wrapping paper for that gift, which could easily cost another R50. If this is your average gift, it means that 20% of your total Christmas spend is not on the actual gift. Put another way, if we didn’t have to purchase cards and wrapping paper, we could spend probably 25% more on our loved ones than we do currently.

I would propose the following improved method for purchasing Christmas gifts:

All Christmas gifts are monetary. We decide how much we want to spend on everyone for Christmas, and we transfer those amounts to those people on Christmas day. People can then use that money to buy their own gifts. This ensures that the final gifts are a better fit to the beneficiary. Secondly, all the admin of purchasing a gift is removed from the giver. Finally, by not having to purchase cards and wrapping paper the total spend remains the same, while the total value of gifts received increases. A heartfelt message can still be sent via email.

A secondary benefit of this process is that you will require someone’s banking details before Christmas day if you want to give them something. Gone are the awkward times where you are surprised by a gift from someone where you haven’t bought them something in return.

In case it wasn’t obvious, this article is written with tongue firmly in cheek. I am off to Gateway Shopping Centre tomorrow on 24 December to buy my family gifts. Wish me luck!

Life cover – Term or whole of life?

I recently read an article that gave the reader ten must follow financial tips. While most of the tips were not that outrageous, the writer did advise the reader to always take term cover instead of whole of life (WOL) cover. This proved to be a fairly controversial point and most of the comments argued either that WOL was always better than term cover, or vice versa.

So, you may be wondering what the difference between term cover and WOL is. Let’s do a quick recap:

Term Life cover only covers you for a set number of years, after which the policy ceases and you no longer have cover. If you die before the end of the term, your beneficiaries are paid out a lump sum. If you die after the end of the term, no payment is made because cover has ceased.

WOL cover has no term. The policy remains in force for the rest of your life. On your death, whenever that may be, the policy will pay out to your beneficiaries.

WOL will cost more than term cover, because it offers you cover for the rest of your life.

Why did the writer of the article advise you to always choose term cover over WOL? He argued that you should take the lower premium offered by the term life cover, and invest the difference between the term premiums and the WOL premiums. Once your term life cover ceases you now have no more life cover, but you do have an investment from all the savings you have made.

While this is an option, there are several issues I have with advising people to always choose fixed term over WOL. These are:

  • The savings might not be big enough to justify choosing term life cover

Let’s take an example of a 40 year old man who wants R10 million in life cover. His premiums for WOL cover would be R2320 per month. His premiums for term cover to age 65 would be R1950 per month. So by taking term cover he would save R370 per month.

If he was to invest the savings for the next 25 years and earn a return of 10% after tax, charges and commission, he would have a portfolio of R582,665 at age 65. However, if he was to take the WOL option, he would still have life cover in force of R19.2 million at age 65. Which is worth more, the life cover or the investment? That depends on your personal circumstances and attitude to risk, but it is impossible to declare that one is definitely better than the other (as the writer has done). Remember that the savings you make by taking term cover instead of WOL are unique to your personal circumstances, so you would need to tailor the calculations to your own  situation.

Secondly, this is all well in good in a simple example, but not all of us are disciplined to invest those savings every month.

  • The argument ignores your needs

Any good adviser is going to quote you benefits that match your needs. A lot of your life cover needs are best met by term cover, like paying off a mortgage. However, some life cover needs are best met by WOL cover. If you are using life cover to settle estate duties or meet the cost of your funeral, those needs are for your whole life, and so your benefits should also be.

  • Your retirement date is unknown

I always like to think of life cover as the present value of the income I was going to earn for the rest of my life. As such, if you choose term cover, you should pick a term until the day you intend on retiring. Once you’ve retired, you would no longer be earning an income from working, so you have no need for life cover (or so the theory goes).

The problem with this is that it is incredibly difficult to know when you will retire. A lot of people are working to older ages because they can’t afford to retire yet. Choosing term cover with a fixed term places you at risk that you need to work beyond that age and, as such, would need life cover.

  • Continuation options aren’t all they’re cracked up to be

“But what about continuation options built into term life cover?” some may ask. Yes, continuation options do allow you to continue your life cover when you reach the end of the term, but they have two significant problems:

  • Your cover at conversion will be priced for you at that age. This means that your premiums after continuation will probably be significantly higher than your WOL premiums at this stage.
  • These options often require you to go for medical underwriting, which means they will check how healthy you are at continuation. While most policies mention that you have to undergo “minimal underwriting” at continuation, they fail to set out what tests they will and will not perform. This means that you have very little guarantee in terms of avoiding underwriting. It is also worth noting that you will be quite old at continuation date, and at older ages medical underwriting is a very big risk to you obtaining insurance cover, because of the high likelihood of you having a medical condition. Medical underwriting can quite easily result in your premiums being even higher, or cover being declined. Any form of medical underwriting at conversion stage makes the conversion option worthless in my eyes.

Conclusion

So, am I going to tell you that WOL cover is always a better option than term cover? Most definitely not. The most important thing is to understand the difference between WOL and term cover and decide on which is the best match for your needs. Remember that the best solution may be a combination of WOL and term cover (For example R5 million term cover and R5 million WOL cover).