Avoid the lump sum trap: protect your income stream

Durban - Far too few South Africans can lean on life insurance to weather life’s storms – and even those who do have life insurance are generally getting it wrong, says life insurer Bidvest Life.

It’s estimated that fewer than one in five South Africans have any form of insurance. And those who do have life insurance tend to buy conventional life cover, which pays out a lump sum to their beneficiaries when they die. 

What’s wrong with that, you ask? For a start, they aren’t insuring their biggest risk, which is losing their ability to provide a monthly income, says Zanele Ntulini, Bidvest Life’s Chief Marketing Officer. When you’re no longer around, your family and loved ones still have monthly expenses to look after. 

“Human nature is what it is – and often, the greatest temptation when receiving a lump sum payout is to spend it on unnecessary items like expensive cars and luxury holidays, instead of making wise financial decisions for their family’s immediate and future needs,” says Ntulini.

But perhaps the biggest problem with a lump sum payment is that it doesn’t mimic the income stream you need to replace when you’re no longer around. While lump sums are great to settle debts or once-off expenses, they aren’t well suited to provide an ongoing income stream for your beneficiaries. With life income benefits, you won’t have to make assumptions about how much money your dependents will need for the rest of their lives, or worry about investment and inflationary risks that could affect their financial security.

Life income benefits are also much easier to understand and plan for, because they make sense, and they give you the peace of mind that your dependents are looked after when they need it the most. This is particularly relevant in South Africa, where every working person supports themselves and an average of three dependants. 

“Life cover that pays out as an income instead of a lump sum is the future. If you’re in the market for life insurance, don’t just sign up for the first policy that’s offered to you. Talk to a financial adviser about the best way to meet your needs, and instead of traditional lump sum life cover, look at more affordable insurance that pays out as a monthly income to your nominated beneficiaries,” says Ntulini. 

“I have no doubt that millions of South Africans would look at life insurance differently if they knew what life income cover could do for them.”