How to protect your finances should a retrenchment rock your finances

Standard Bank, ABSA, Group Five… Retrenchments in SA in Q2 have increased by 27% from 2018. Tongaat Hulett (5000 jobs in jeopardy) and Deutsche Bank (18 000 jobs set to be cut globally) have issued the latest devastating announcements. The sustained economic downturn is putting extreme pressure on companies, with staff retrenchments being part of the fallout. In tough times, it’s therefore imperative to be prepared. If you’re thinking of making big moves like investing in a home sometime soon, consider how to protect your loved ones from the pressure of debt should a curveball come your way.

Petrie Marx, Product Actuary at Sanlam, says, “One of the best ways to protect you and your loved ones when taking out a loan is to invest in credit life cover. Usually, it’ll be offered to you by the credit provider on the back of the loan you’ve applied for. It protects you in two primary ways.

Firstly, your lifestyle is protected as the credit provider will not lay claim on the asset that was financed, e.g. your family’s home in the case of a mortgage agreement. But secondly, and even for unsecured loans, it won’t leave you, your loved ones, or your estate, with debts that still need to be paid off should you be permanently unable to repay the loan as a result of unexpected death or disability.”

How does credit life cover protect you?

In the case of retrenchment or temporary disability, Marx says a policy’s minimum benefits must include servicing your loan instalments for a period of 12 months. Note, that retrenchment cover doesn’t apply to self-employed customers, but temporary disability cover should still be provided. In the event of death or permanent disability, your outstanding loan balance will be settled in full.

“Regulations also allow for the substitution of the policy offered by the credit provider with a policy of the consumer’s choice, provided that such a policy provides at least these prescribed benefits. Most people consider this option and then chat to a financial adviser, especially for bigger loans like mortgage agreements. The policy is typically ceded to the bank as security for the loan.”

How much will it cost you?

Marx says the maximum cost is now regulated to ensure all consumers get good value from credit life insurance. The maximum cost is R2 per R1000 of the loan value, for a mortgage agreement (so R2000 on a R1-million loan). Higher limits apply to short-term credit transactions and unsecured loans. The cost of the cover varies according to your age, risk profile and health status. A young, non-smoking client, for example, can expect to pay about R800 per month.

Is it one of the best ways to protect your home if you get retrenched?

Marx believes it is, “Cover against retrenchment is not easily obtainable on a stand-alone basis. Also, retrenchment cover is not the only protection customers need. Credit life cover provides holistic protection. A serious accident or illness that will result in the temporary inability to pay your instalments may also strike without warning. Not to mention even more serious events that could leave you permanently unable to pay.”

What are the biggest benefits?

• You and your family are protected. You’ll be able to stay in your home and not be burdened with outstanding debt, should something happen to you.

• With some products like Sanlam’s credit life benefit, the cover amount doesn’t reduce as the loan amount is paid off. That means you could have excess cover in the case of retrenchment, disability or death.

• Cover can also continue even after a loan is paid off. That means a new policy may not be required should, for example, you take out a new loan or borrow again against the ‘access bond’.

What are some of the other ways to protect your family financially in tough economic times?

Marx suggests the following:

1. Control your overall debt levels. Ensure your overall repayments are under control at all times, but especially if the industry or business you work in is feeling the effects of slower economic activity.

2. Guard against unnecessary loans, and first pay off your most expensive debts, such as credit cards and retail debts for clothing and furniture.

3. Save for an emergency fund of at least 6 months’ salary, that you can call on in the case something adverse, like a retrenchment, happens unexpectedly.

Marx concludes that it’s always best to speak to a financial adviser to ensure contingency plans are in place should curveballs hit.

ENDS