covering one’s debts

for the provision of liquidity in one’s estate (rather than a fire sale of prime assets).

Once these basic obligations have been fulfilled, then one typically has sufficient life cover.

Below is a copy of a letter I wrote to a client who, apart from his aversion to life cover, is an extremely intelligent and rational person.

“As discussed with you previously, your present situation is that R20 000 pm is needed by your dependents as a future income. You presently have a shortfall of approximately one million rand to cover that income. One million rand life cover will cost you R261.55 pm. If we divide R261.55 into one million rand you’ll see that you have to pay this R261.55 pm for 318 years to make up the one million rand (if we assume a no interest).

You have stated that you will rather invest R1 000 pm into SATRIX 40. If we assume a growth rate of 10% pa compounded monthly; it will take you 22½ years to build up one million rand capital. If you invest R738.45 pm into SATRIX 40 and R261.55 into a life policy it will take you just over 25 years to build up one million rand capital, but you would not have the down side risk of insufficient capital should you prematurely pass away.”

Despite the obvious risks that the client’s dependants are exposed to while he is building up capital, he decided not to take the cover. To date, they haven’t needed it, but they still have 22 years before the SATRIX 40 investment will probably reach one million rand!

Another argument I often hear against the use of life cover, especially when it is for individuals with high value but illiquid estates (like buildings or farms), is that their heirs should sell a building or take out a bond. However if we look at a 50 year old male who has a sizeable estate and needs to pay R5million in estate duty, a R5 million building yielding 10% would produce an income of R500 000 pa, while a bond of R5 million over 10 years would cost approximately R66 075 p.m. It generally does not make sense that an otherwise rational businessman would want to choose these options rather than pay a life cover premium of R2 600pm.

Unfortunately life cover, like rugby and politics, seems to be one of those areas where reason often takes a back seat and emotions take control. It is important to make an accurate assessment of future obligations and then to assess the most efficient way to meet this obligation.

Kind regards,

Barry Hugo

info@seedinvestments.co.za
www.seedinvestments.co.za
021 914 4966