When you’re struggling to repay your debt, debt review offers a lifeline so you can manage your finances and pay off your debt, and avoid being permanently blacklisted or sequestrated, or losing your assets such as your home.
Debt review makes us look at what expenses really matter so that we spend our money wisely on what we absolutely need and cut out anything unnecessary. Where does your life insurance fit – is it essential or is it a luxury? We believe it is essential that you hold on to your insurance cover if you can. Here’s why:
Your life insurance matters more if you are in debt
Life insurance may not seem like an essential right now, because you only need it when you pass on. However, if you are in debt, life insurance can be even more important. It can prevent your beneficiaries being stuck with your debt. The policy payout can be used to clear the debt.
Let’s look at an example using a R500 000 life cover policy with the spouse as the beneficiary:
| Life policy cover amount | Debt owing at death | Amount spouse receives from insurance claim | Amount used to pay off debt | Net amount spouse has to use for expenses | |
|---|---|---|---|---|---|
| Life cover is kept in debt review | R500 000 | R250 000 | R500 000 | R250 000 | R250 000 |
| Life cover is cancelled in debt review | R0 | R250 000 | R0 | R0 | -R250 000 |
As you can see, that R500 000 makes a huge difference to the spouse. Without cover, the spouse could be in debt.
Debt review is about getting your financial life on track again – and managing your money more responsibly. It is responsible to care of your family, and that responsibility doesn’t fall away because you are in debt review. You can give your family financial peace of mind, even if you are in debt review, by keeping your life cover in place.
Life cover payouts are paid directly to your beneficiary
This is an often overlooked aspect of life insurance policies that adds a lot of value to beneficiaries. When you pass on, your nominated beneficiary or beneficiaries receive the payout from your policy directly. The payout doesn’t form part of the estate.
If there are funds that form part of your estate, they first need to be paid to the estate, which has to be administered. This can be a long and costly process. Only when the estate is wound up, the proceeds, less the expenses and amounts paid to creditors, are paid to your heirs. A life insurance payout to a beneficiary bypasses this administration and is immediately available to your family.
Cancelling a policy and taking out a new policy could mean a higher premium
Even if you’re healthy, insurance premiums tend to increase with age so if you cancel your policy with the intention of taking out a new policy when you’re out of debt review you might find you have to pay a higher premium for the same cover. It makes more sense from an affordability perspective to keep your existing policy.
Your 1Life policy is flexible
We know you need to free up as much cash as possible when you are in debt review, and we can look at some alternatives to make your premium more affordable while still giving you and your family some cover. You can contact us to find out how we can assist.
The last word
Debt review is about getting you back on a sound financial footing. It does involve some financial adjustments but it isn’t meant to affect your lifestyle too much. Some expenses can be cut, and you may find others are not as necessary as you thought they were, but be careful of lumping insurance with the expenses you can do without. Life cover makes sure your family is taken care of when you cannot provide for them, and keeping it in place eases the financial worry of what happens when you are no longer around.
Frequently asked questions
Holding on to your life insurance cover during debt review is crucial because it provides protection for your loved ones in case of your untimely passing. The policy payout can be used to settle any outstanding debts, ensuring that your beneficiaries are not burdened with financial liabilities.
Life insurance becomes even more important when you are in debt. It prevents your beneficiaries from inheriting your debt, as the policy payout is used to clear any outstanding balances. This financial security can bring peace of mind to both you and your family during challenging times.
No, one of the significant advantages of life insurance is that the payouts are paid directly to the nominated beneficiary. They do not form part of the estate and, therefore, bypass the estate administration process, providing immediate access to funds for your family.
Yes, your 1Life policy is flexible, and there may be alternatives to make your premium more affordable while still maintaining some level of coverage for you and your family. Reach out to us to explore the available options and find the best solution for your needs.
Debt review is meant to help you regain financial stability without drastically affecting your lifestyle. While some expenses can be reduced, it's important to carefully consider which costs to cut. Life insurance is a safeguard for your family's future and should not be overlooked as an essential expense. Keeping your life cover in place provides financial security for your loved ones even after you're gone.
