Cut back on luxuries before cutting insurance
With fuel price and VAT increases adding to the pressure on household budgets, you may be tempted to ditch some insurance cover.
But allowing policies to lapse by not paying the premiums - without reviewing whether it's necessary cover or not - exposes you to a potential financial disaster.
Insurers suggest you find other ways of reducing your costs.
Lizl Budhram, the head of advice at Old Mutual Personal Finance, says consumers often think that they are not getting any immediate value from a life assurance policy and that they can cancel a policy now and start it again later when they are more cash flush.
But, she says, they forget that later the premiums may cost more because you are older and potentially a higher risk to the assurer or, if you have developed health problems, you may even be uninsurable.
Susan Steward, spokeswoman for short-term insurer Budget Insurance, says often people choose to cancel their insurance when they are looking for ways to cut down their monthly costs because insurance is seen as a grudge purchase.
George Kolbe, head of marketing at Momentum Myriad, says without reducing cover, participating in a rewards programme such as Myriad could reduce your premiums as the programme offers premium discounts for information about risks to your life and health through health tests and questionnaires.
Momentum policyholders who participate in the life assurer's Multiply rewards programme are less inclined to cancel policies when budgets are under pressure because they are more aware of the benefits of the value of their products.
The lapse rate for policyholders on the rewards programme is half that for policyholders not on the programme because policyholders using the programme are more aware of the value of the products, says Jenny Ingram, head of risk product development at Momentum.
Ingram says you could check if you still need to have as much cover as you have, especially if you have paid off debt or if the support you need for dependants has reduced since you took out your cover.
If you are paying premium loadings for health conditions or smoking, you can have these reviewed if your health has improved or you have stopped smoking, she says.
Ingram says you should not confuse the relatively small increase from the additional percentage point on the VAT rate with annual premium increases. Premiums may increase by more than inflation if your premiums are linked to your age and hence your risk. Some life policies have aggressive age-related increases. Momentum prefers to set premiums higher initially and ensure increases are sustainable, Ingram says.
Ensuring you are adequately covered should be a priorityBoitumelo Mothoagae, financial adviser at Liberty
Steward says if you are struggling to make your monthly insurance payments, you should speak to your insurance company rather than let the policy lapse.
She says you can reduce your premiums by insuring your vehicle for the correct value, removing old and discarded items from your household insurance and reducing the values of appliances that have become cheaper, reducing the duplication of services such as roadside assistance across providers and increasing your home and vehicle security.
Natasha Kawulesar, head of client relations at OUTsurance, says while cancelling your insurance cover might provide some short-term relief on a tight budget, the financial impact of an accident, or theft or damage to a home can be crippling.
What seems like a solution to a problem when you decide to cancel insurance cover can be a huge mistake, she says.
Ingram says it is not uncommon for those with previously insured lives to die or suffer a disability shortly after cancelling a policy.
Budhram says you are more likely to think twice about cancelling savings policies if you have set a savings goal.
She says you should not forget that you could incur penalties on policies with contractual terms if you stop or reduce your premiums.
She suggests you reduce the level of cover or remove some of the non-essential add-on benefits to balance your budget if you need to.
James Coutinho, head of group corporate and client tax at Liberty, says life is uncertain and it is impossible to predict when a life-changing event will impact you and your family. Rather than cancelling the protection offered by life assurance, you should review your budget and consider cutting back on "luxuries" until your financial situation improves.
Boitumelo Mothoagae, a financial adviser at Liberty, says insurance cover is extremely important to protect your assets.
"The reality is that very few of us would be able to replace any of our high-net-worth assets, for example cars, your ability to earn an income, or furniture without having to dip into our savings, or worse, getting into debt. It is therefore critical that as one of your financial planning activities, you should ensure that you are adequately covered and this should be a priority."
She suggests you pick some luxury costs you can either cut out completely for a while - for example, buying new clothes for the rest of the year - or which you can reduce - for example, one cup of coffee a day instead of three, or carpooling instead of driving alone.
What's VATable and what's not
Long-term insurance policies covering you against death, disability, severe illness and providing funeral cover are generally VAT exempt, says Leonard Willemse, senior tax consultant at Mazars. However, there could be elements of your cover that are not VAT exempt, he says.
George Kolbe, head of marketing at Momentum Myriad, says VAT is payable on commission paid to an adviser who sold you a policy.
Momentum and Liberty will absorb the cost for now.
Short-term insurance premiums are VATable and any premiums paid from April 1 will be subject to the higher VAT rate, the South African Insurance Association says.
Insurers are not obliged to inform you of the increase in your premiums, nor do they have to give you 30 days' notice, the Financial Sector Conduct Authority has confirmed to the SAIA.
Medical scheme contributions are not subject to VAT but medical schemes will be paying VAT for medical services for members at the higher rate from this month.
If schemes need to put up contributions they need to apply to the Council for Medical Schemes for an interim increase. Paresh Prema, head of benefit management at the CMS, expects most schemes will pay the additional costs from their reserves and adjust contributions at the end of the year.