Money is inextricably linked to every aspect of our lives. Every milestone and setback is either helped or hindered by our financial situation. When we plan for life events like weddings, babies, retirement or death, we also think about their financial impact.
Most of us fall short in planning for things we don’t like thinking about. When our nightmares become a reality, the last thing we want to worry about is money. This is normally what insurance is for. Sadly the insurance industry is a flakey ally.
In this week’s show, we discuss the financial impact of debilitating sickness. We talk about the preparations you should think about when you’re healthy, as well as some options for people who are already dealing with this difficult reality.
Louis
Over the last couple of years I went from buying a new, heavily financed car every one or two years, to (almost) owning one car for four years and the other for 10+ years.
I scaled down after parting ways with a major client. I decided to pay off all debt except my house. I saved the R8,000 I would have paid on my car each month and in 2.5 years had the money earning interest in my bond. I started investing in the stock market and also have a number of ETFs, including a CoreShares tax free account that actually gave me a good return over the last three years.
We adopted at the ripe young age of 45, which changed my outlook on money. My wife was diagnosed with MS last year. Suddenly all the insurance policies and annuities became important as we had to become a single income family.
We took out a combined policy with life cover and LIVING LIFESTYLE COVER (with all the PLUSES, which Liberty say they gave us for free). According to what my current broker and I could deduct – upon diagnosis we should receive 25% of our insured value.
This is not the case, though. Liberty has their own definition of MS and you should tick a number of boxes. Even though my wife had several problems relating to MS, we were not entitled to any payment. Not once did Liberty make contact with my wife’s neurologist, doctor or anyone else.
My wife had a relapse during the year. At first Liberty again refused any claim without making contact with anyone. Eventually they paid 25% according to their sliding scale. Now that my wife stopped working, I’ve had to employ a neurologist to advise me in order to decide on further action.
In our situation we will survive on my income, taking into account retirement provision might be a problem. What do other people do when the sole breadwinner is in the same situation?
Secondly I checked the annuity we have been paying for the last 15+ years and realised that the return was just over 6% for the period after cost.
The obvious thing to do was to cancel, for which the charge is 5%. They say that after 15 years they have not recovered all their cost. There is a contribution charge of 4.5% and then they charge a management fee of almost 2% on top of that.
I wrote to the pension fund adjudicator and after waiting almost seven months and requesting feedback a number of times, I received feedback basically saying they can charge up to 20%. I am moving the money in any case as I am sure we will be able to do better somewhere else. R14,000 on a R280,000 value. If you deduct the R14,000 my real growth over the period is probably very close to 0%.
What is the best fund with a moderate to high risk to try and make up for lost years? We already have investments in Allan Gray Balanced and similar funds.
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Clean bleeped show is below.
Gareth
The problem with dread disease cover is the companies’ definitions of their sicknesses. I unfortunately had the same claim disappointment when my wife was diagnosed with Crohn’s disease, I then only found out that they pay out 25% of the dread disease assured amount. The same goes for MS and most autoimmune diseases.
We pay discovery R12,000 pm on the top Medical aid so they can pay R30,000pm for her medicine.
Liberty should’ve asked for medical reports etc from the doctor as part of the claim process.
I always say that dread disease is a nice to have, same as capital disability, but the most important benefit to have is income protection. The income protection doesn’t look at your illness but more at your ability to do your specified occupation. It is more expensive but will pay out in a lot more cases.
Win of the week: Riani, who is 13, and her sister Juané, who is 7. Their mom tells me they already know what the ALSI is.
Brendon
I’m able to invest R15,000 a month. Should I go down the ETF or individual share route? Do I incorporate property ETFs too? Should I open an EasyEquities account or with another company?
Steve
I’m still left wondering what to buy, especially for my TFSA. There just doesn’t seem to be any right or wrong answer?
All things considered, what would be your preferences if you wanted exposure to the following:
US Markets?
World Market – Developed?
World Market – Developed & Emerging?
South Africa?
My understanding is that the US leads the world economy so what are the chances of their markets slowing down while the rest of the world starts ticking? If that’s unlikely, surely one could just as well stick with the US?
Donal
I did a spreadsheet to work out the tax for the two scenarios and I then backtracked and worked out the present value. There’s not a huge difference. The tax man would get almost the same amount of tax from me eventually even if I leave the pension alone!
I’ve listened to you guys saying many times we should clear our debt as fast as possible.
I currently have a large car loan at prime + 0.9%. I change my car approx every 2.5 years. In that time I’ll generally only have paid off half the loan. My trade-in value usually just covers the outstanding amount and then I need to get a new loan for the full value of the next car and the cycle starts all over again.
I commute to work and drive approx 1,000km per week. So after 2.5 years I’ve clocked up around 120,000km. That’s around the time that things start to go pear-shaped with a car.
I could pay extra into the loan and reduce the capital quicker. Let’s say, for example, instead of paying into my TFSA I put R2750 per month into my car loan. So, like I do, I’ve run a spreadsheet and I’ve found that after 18 months (which is when I will change again) my capital balance will be R60k less than if I didn’t pay in the extra. So the loan on my next car will be R60k better off. This sounds great, but the problem then is that my TFSA capital doesn’t grow! And if I continue to do this every time I buy a car I’ll then my TFSA will always suffer.
Eventually I’ll be in the situation where my initial loan amount will be small enough that I’ll be able to pay off my car loan before I have to change my car again. In that period I can catch up on savings for a few months. But I reckon it’s going to take about five more car changes to get to that stage! By then I would almost have my TFSA maxed to R500k and I should be sitting back with my feet up watching it grow and grow!
The thought of not investing in my TFSA for the next 10 years is extremely painful and seems to be counter-intuitive. But should I just suck it up and rather focus on clearing my car loan every month?
Sabata
You guys were slagging retirement annuities as if they are lepers! Any unused contributions to an RA can be carried forward, which you mentioned somewhat unconvincingly.
This is not a ‘small benefit’, as you stated. These unclaimed contributions can be carried forward all the way to retirement. By then you probably won’t be investing for retirement. You can use these to increase your tax-free lump sum you’re allowed to withdraw, or to reduce the tax payable during retirement.
Say you retire with R 50,000 per month. Tax payable would be R 12,582.25 per month. Let’s say you have enough unclaimed contributions banked. You could then claim your 27.5% of taxable income as an RA contribution. This would reduce your taxable income to R 36,250 even though you will no longer be making these contributions. Your tax would be R 7,521.25, a saving of R 5,061 per month! That’s worth a lot of bubbles, especially if you drink Four Cousins!
About your diplomat who is based in Botswana, is she exempt from RSA tax because she is out of the country for more than 183 days, or is it because of her occupation? I think it’s the former.
Rieneke
I have a slightly different take on the issue. Use life cover as life cover when you need it, but change the purpose to inheritance when you no longer need it.
You often take out life cover with a young family as you have to provide for them should something happen to you. As the kids then leave home or you no longer have dependants, the life cover is cancelled. Especially older folks who might no longer be able to afford the cover. In that case, offer it to your children as an investment. You have low premiums, having started young.
Taking it out with the purpose of inheritance when you’re older is too expensive and taking it out with this purpose when you’re young is also expensive due to time and as your fortunes change, might also not be able to sustain it, in which case it was wasted.
Ros
I’m keen to move my emergency fund from a Money Market account to TymeBank. This seems like a no-brainer – If I understand their Ts & Cs correctly, once your money had been in a GoalSave account for 90 days, you get 10% interest for a 10-day notice period, up to a maximum of R100 000.
I mentioned this to my Mom and she was very concerned that the bank could go under, a-la African Bank or VBS. What are your thoughts on this?
Stealthy Wealth’s FIRE-people are organising get-togethers in Durban, Cape Town and Port Elizabeth. Find out more here.
The Fat Wallet Show is a no-nonsense personal finance and investment podcast hosted by Kristia van Heerden and Simon Brown. Every week we answer questions by a growing audience of finance enthusiasts. Submit your pressing money and investment questions to ask@justonelap.com.
