The ins and outs of insurance – On the Money with Jarryd Neves

Jarryd Neves
On the Money. Budding stock market investor Jarryd Neves, of BizNews, sends out an invitation to everyone who wants to ask questions about share investing – but is too embarrassed to ask. Write to [email protected] And tune in for his regular Monday column: On the Money

You wouldn’t jump out of a plane without a parachute, would you? No, me neither. Your instinct of self-preservation would kick in, preventing you from taking a very stressful, adrenalin-filled plunge to an untimely demise.

So then why do we go through life without the proverbial parachute strapped to our backs? I’m talking about insurance, of course. Life is rather fond of throwing obstacles in our path and insurance can often assist us in navigating those hurdles.

A fortnight ago, my mother borrowed my car to nip down to the shops. Ten minutes later, she was back and in great distress. On her way to the grocery store, a small accident had occurred. Thankfully, she and the other driver were unharmed, with my dear car taking the brunt.

No matter – accidents happen. And that’s what insurance is for. The excess was a drop in the ocean compared to the cost of repair. Thankfully, the car was insured – something a lot of South Africans neglect.

Now, my intention is not to sound self-congratulatory or smug. Quite frankly, had I not been insured, I’d be sitting with a damaged car and an alarming quote from a panel beater.

Insurance – not just car cover – is so important. It protects from financial turmoil and the uncertainty that life throws at us. What’s more, that monthly premium guarantees your safety and security should the worst happen. The main types of insurance people usually take out are home, life, car, and medical insurance. Let’s unpack the benefits of all four:

Home insurance
Your home is your castle, and aside from having an actual castle with an alligator-infested moat and many knights in shining armour, the reality is that your home is susceptible to a number of threats. Criminals with restless fingers may want to help themselves to your possessions. Fire or natural disasters can obliterate everything you own. Simple accidents can leave you with property damage.
While there is no law that makes home insurance essential, it is often required when taking out a home loan. There are benefits to this. Home repairs are covered and often sorted out quickly. You are financially covered if a pesky thief makes off with your valuables. Your home is one of the most expensive purchases you’re likely to make, so it makes sense to protect it. According to ooba.co.za, home insurance also protects you against unforeseen circumstances. “If your geyser bursts, the insurance will cover its replacement and any consequential loss up to a certain amount, such as the costs of replacing tiles and painting”.
Life insurance
When the Grim Reaper decides to pop in for a drink, you have no choice but to let him in. Nobody likes to talk about it, but death is inevitable. You do have a choice, though, to financially prepare for that moment by getting your affairs in order, keeping an updated will and keeping your finances neat and tidy.
Life insurance forms part of this. Many people think life insurance is a luxury, but for many it isn’t. There are a number of benefits that come with a life insurance policy. For individuals who have financial dependents – or debt – it is essential. Not only can you provide for your family long after you’re gone, but you won’t burden them with debt or unnecessary expenses. It can help pay for school or university fees, too – a huge cost as the years roll by.
Car insurance
Every day we get behind the wheel, we trundle along the motorway at 120km/h, a couple of metres away from other vehicles doing the same speed. We’re rather cocky about it, too. We fancy ourselves as multitaskers, using our phones, eating, and doing all kinds of things while in control of two tons of metal, glass, and plastic.
To protect yourself from reckless drivers – and other threats – car insurance is essential. Damage sustained as a result of an accident, fire, or even hail is covered, saving you thousands. If someone decides they really like your car and simply must have it, you’re covered for theft and hi-jacking. In South Africa – where these crimes are all too common – it is a must-have.
Health insurance
Like death, no one wants to think about falling ill. But the reality is that many people find themselves in need of expensive medical assistance. Health insurance – or medical aid as it’s more commonly known – covers you if you need to be hospitalised, require surgery, or simply need cold medication.
There are numerous packages available, all varying in price and coverage. Medical aid is often criticised for being expensive and out of reach for many South Africans. A hospital plan is a more cost-efficient alternative. This covers you for treatment and medical procedures at a private hospital, just like a medical aid. The difference is that medication and visits to the GP are not covered. Costlier it may be, but medical aid does cover the aforementioned expenses and even things like the dentist, depending on your plan.
R. Chetty asked,
I’m a 52-year-old wanting to know if I can use my discretionary investment of R900,000 towards my retirement. 

I have a GEPF pension fund, currently at R1.8mn and a retirement annuity at R200,000. I would like to know if I can invest all of the above to receive a monthly pension. I currently earn R326,000 per annum and my overtime is about R80,000 per annum. How should I structure these amounts to receive R18,000 a month?

I want to be tax efficient in all aspects.

Johan answers,

Let me start by saying that I am not a financial advisor, and therefore I am not qualified to give financial advice. Please consult a qualified financial advisor to help you structure your finances according to your personal objectives and risk tolerance. But let me give you a few points to consider. In order for you to draw R18,000 from an investment portfolio of R2.9m, it will need to produce a pre-tax return of 7.45%, if you do not want to draw down on the capital (18k x 12/2.9m). Assuming an effective tax rate of 25%, this return becomes 9.93%.

Ideally, you would want the portfolio and the income drawn to grow by inflation to maintain its purchasing power. Therefore, you should add 4-6% to this required return, depending on your expectation of inflation going forward. This return requirement is quite steep, given that money market rates are roughly 4% currently. Bringing this back to your question about asset allocation, it means that you will need to allocate more heavily to growth assets like equities, in order to meet this target over time. Over the long-term, equities have proven their ability to generate inflation-beating returns.

However, it is important to remember that a broad, globally-diversified portfolio will give you the best chance to adequately provide for retirement. This is all food for thought to discuss with your qualified financial advisor.

Chris asked,

I am keen to start investing, but I have no idea where to begin? I’ve thought about starting small, with R500 p/m. Where should I start and what is a good first investment?

Josh answers,

Excellent that you want to make a start. Investing as early as possible when you start earning an income is great as compound interest allows your account balance to snowball over time. The earlier that money starts working to make more money, the better off you will be down the road. There are many options to start for R500 per month, but a tax-free savings account (TFSA) is an excellent choice because of the tax efficiency it offers.

You can open a TFSA with the majority of asset managers in South Africa or your bank, subject to a maximum contribution limit of R36,000 per year. This investment would be entirely liquid, and you will not be liable to pay any tax on the returns earned within this product. It is important to choose an investment strategy that will suit your saving goals and time horizon.

If you are young and starting to invest for the first time, you are able to seek out bigger returns by taking on bigger risk and can therefore invest more in riskier asset classes such as equities. This is because you are in a position to ride out volatility and have time to recover the losses through income generation. Read more about the value of a tax-free savings account in an overall financial plan.

  • Johan Steyn, CFA is a lecturer in investment management, from the department of business management at Stellenbosch University. He holds a Masters in investment management and has a background in fund management. Josh MacRae is a financial advisor at Brenthurst Wealth Management.

Have a question about share investing? Write to me at [email protected].

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