Life cover: with investment?

Gerrit Viljoen, a certified financial planner of the Pretoria-based Ultima Financial Planners, responds:

Life policies with investment portions have fallen out of favour because it is very difficult to determine the real return on your money.

These policies were in essence endowment policies with extra life cover, but in the end wasn't really a full-blooded endowment policy - nor a good life policy.

An example - if someone paid R500 a month for a policy which would have paid out with life cover of R400 000, the life cover component would cost some R100 a month.

If the policy paid out R138 415 after 15 years, the policyholder would be unhappy given that he paid R500 a month.

If he died before the term was over, R400 000 would have been paid to his dependants, who would also be dissatisfied about the level of cover, seeing that he paid a premium of R500 a month.

These types of policies were very popular with brokers in the past, because they could encourage policyholders to extend the term of the policy and (because life cover was part of the policy) earn more commission.

But it is much more to your advantage to separate the two components so that you can establish exactly how much the return is on the savings component and only pay the minimum needed for life insurance.

You can use the money you would have paid for the savings component to settle debt, or to invest elsewhere.

- Fin24.com