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Should I keep my insufficient income protection cover?

If you have emergency funding that will be sufficient to cover your monthly expenses for at least six months, you may consider cancelling the cover.

I took salary protection cover (retrenchment) of R12 000 back in 2015. The product was subsequently stopped with the implication that I could not increase the cover amount. My salary has increased significantly since then and R12 000 seems small. The monthly premiums have increased from R150 to R240 currently. Is it worth it to keep the cover? I work in the mining sector which is notorious for retrenchments.

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Thanks so much for the question. For the purpose of answering your question, we have assumed that your retrenchment protector provides cover for a period of six months following your retrenchment, which is what most retrenchment benefits provide. Some retrenchment protectors provide cover for a period of 12 months, although this would naturally affect your premiums quite significantly.

Typically, the reason for a retrenchment protector would be to assist with your cash flow in the event that you become retrenched as you will still need to cover your monthly living expenses. Ideally, first prize would be to have sufficient emergency funding in place to cover your monthly living expenses for a period of between six and 12 months, although the time period would also be dependent on other factors such as the nature of your job, the industry in which you work, and your particular set of skills.

While you might not currently have this level of emergency funding in place, you could work towards building up your emergency funding to a comfortable level which would then allow you to cancel your retrenchment cover. As we do not have full insight into the exact details of your current situation, we would like to point out a number of things to consider before cancelling your cover:

(i) Current level of emergency fund savings

As mentioned above, if you have a comfortable level of emergency cover in place which would be sufficient to cover your monthly living expenses for a period of at least six months, you may wish to consider cancelling your retrenchment cover.

(ii) UIF

It is important to remember that as long as your employer has been contributing to the Unemployment Insurance Fund (UIF) on your behalf, in the event of losing your job you will be able to claim for the UIF. Please see this link for a more detailed explanation of what your benefits could be.

(iii) Simple maths

Ignoring what you have already paid towards the policy, if we assume the price of the policy of R240 a month doesn’t change, and you cancelled the policy and channelled those monthly savings towards an emergency account, it will take approximately 25 years to save up to what the benefit would be worth, which is R72 000 (based on a six-month payout). As such, if you do not have any emergency funding in place, regardless of the extent to which the benefit covers your current monthly living expenses, and taking into account the high rate of retrenchment in your industry, it might be beneficial to keep the policy in place until you have amassed sufficient emergency funding.

(iv) Terms and conditions

Finally, we strongly recommend that you read the terms and conditions of your retrenchment policy to ensure that you understand what criteria need to be met in order for you to claim successfully. Very often there are loopholes and fine print which only come to light at the claims stage which can impede your ability to claim from the policy.

Do you have any questions you would like answered by registered financial planners?

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Quit using credit GET DEBT FREE and save. A tip from Uncle Joe.

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