Retrenchment cover is more important now than ever before

The past two years demonstrated very clearly that even if you are gainfully employed right now, there are no guarantees you won’t end up in a financial pickle later, which is why retrenchment cover has become a necessity.

With no good economic news on the horizon, retrenchment is also still lurking around and you can never be too sure that you will keep your job.

Being retrenched is one of the most traumatic transitions you can go through in your career, says Lee Bromfield, CEO of FNB Life. “The shock of retrenchment, coupled with the financial stress, can leave you uncertain about how to go on.”

He adds that consumers who do not have retrenchment cover are exposed to greater financial risk when they are let go, which explains why one of the biggest lessons drawn from the pandemic is to consider retrenchment cover.

“Typically, retrenchment insurance pays up to 70% of your taxable salary depending on your tax bracket for up to six months. The idea is that retrenchment insurance payments over six months will allow you to meet your financial commitments until you find a new source of income, such as finding another job or starting a business.”

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When they are retrenched people can easily find themselves skipping bill payments, which can result in bad credit records. However, if you follow basic money management principles, you can avoid this.

Get a financial buffer in case of retrenchment

Bromfield says you must consider these tips to ensure that you have some financial buffer in place if you are retrenched:

• Make sure you have credit or income protection insurance: People with retrenchment insurance or credit protection insurance may be exempt from paying some of their debts for six months, while other debts may be written off. Most options have a 6-month waiting period and pay up to R30 000 per month for 6 months if you are retrenched. However, it is critical to research your options and weigh up the various benefits.

• Get financial advice: Get yourself a financial adviser who will guide you through the decisions you have to make in the wake of your retrenchment. Ensure that the adviser you choose to work with is completely independent and has your best interests at heart. Your adviser will be able to help you make the best decisions regarding your severance package, retirement fund benefits, group life cover and medical aid.

• Protect your retrenchment package: Resist the temptation to spend all of your retrenchment money impulsively. Create a budget based on any emergency funds you have available to determine how long your funds will last. A good financial adviser will advise you on the best vehicle to house these funds while you make plans for future employment or business opportunities.

• Protect your risk: If you have group life cover, check whether it provides you with an option to continue. A continuation option allows you to retain the life cover without undergoing medical underwriting. Also do not cancel your medical aid. If your employer has been paying your medical aid premiums on your behalf, give your medical aid debit order instructions to ensure that there is no lapse in coverage and that nothing falls through the cracks during this trying time.

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Credit insurance can cover you if you are retrenched

“If you have debt such as a short-term loan, credit card or even car finance, there is a good chance that you have credit insurance. In many cases, the credit insurance will provide cover for retrenchment and depending on your insurance, it would cover between 6 and 12 months of your credit instalments,” Bromfield says.

Credit life policies are often included with home loans, car loans and other credit agreements to cover what you owe the credit provider if you cannot meet your repayments because of disability or death.

For example, if you pass away while owing an amount on your car loan, this type of policy will settle the debt, leaving your estate free of that liability. Many credit life policies include a retrenchment benefit, to ensure that if you are retrenched, the debt covered by the policy will be settled.

During the pandemic, FNB Life announced that it was extending its credit life insurance benefits to cover, among other things, people who took out retrenchment cover and were not able to claim even when they were not earning any income.

“Customers with policies taken out before the implementation of the NCA Credit Life Regulation, which are restricted to retrenchment cover, are able to claim where they have not been retrenched but are unable to earn an income for various reasons,” Bromfield says.