There have been many instances where people have received large sums of money from an insurance pay out and have blown it all unwisely. The TV series I Blew It shows a few examples of this and many have experienced this first hand or seen family and friends go through the same. When there is little to no financial literacy, the chances of bankrolling a few good times and leaving nothing for later is probably higher than investing life, disability, or critical illness insurance pay outs wisely.
While television series of this kind provide a kind of self-deprecating mirth at how easy it is to lose R20 million in just a few months, it’s also easy to sense that money lulls people into a sense of invincibility that cannot be further from the truth. According to research by a psychological support group, money doesn’t give or create real security in our lives. Rather, it provides feelings of validation, power, and control – a false sense of control that we have for the short time we can wield all the money we never had.
Metropolitan representative Abulela Gazi sheds some light on how we can use this money without being wasteful. “The best thing to do when you receive a lump-sum in insurance pay outs is to hold onto it before making any significant financial decisions such as selling your home and buying a yacht” says Abulela. While it may be tempting to do just that, remember that the money you receive is meant to be in lieu of the salary that has been lost through a loved one’s death or your inability to work. Keeping a portion of the pay out in cash will allow you to cover bills and other pressing financial needs. Saving that money needed immediately in an account will incur fees and might, over time, cost you more. Instead, consider putting the pay out in a high-yield savings account to earn interest on the balance.
If the family breadwinner passes away or becomes unable to work, set aside more in an emergency fund to keep the family afloat financially as others search for jobs. You can simulate a monthly salary by setting up debit orders from a savings account into a cheque account. That way, the temptation to splurge is alleviated.
There is also the option to take out either term or whole insurance. Term life is considered your traditional insurance, whereas whole insurance adds a cash value component that you can tap into during your lifetime. Term coverage only protects you for a limited number of years, while whole insurance provides lifelong protection with higher premiums. While term policies are cheaper in the short-term, they expire after the stipulated term and cannot be used to generate wealth to ensure a family’s financial stability in the future.
Whole policies, however, cost much more – in some cased 15% more than term policies – but you pay the same monthly premium for the duration of the policy. Those premiums are split into the insurance component, while the other helps build your cash value, which grows over time.
Understanding the financial choices, you can make can help avoid situations where you make instant gratification purchases, with that pay out having little thought for the future. “While it may seem like a wonderful idea to get that Ferrari you always dreamed of, it will only provide joy and comfort for a short-term and can’t see you through the rest of your life”, concludes Gazi.