Being retrenched is one of the most traumatic transitions a person can go through in their career, and as the world grapples with the aftermath of the pandemic and strained economies, retrenchments are unfortunately still a reality for many people.

The shock of being retrenched, coupled with the financial stress, may leave a person uncertain about how to proceed. Sadly, consumers who do not have retrenchment cover are exposed to greater financial risk when they’re cut back.

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 the monthly retrenchment insurance payments 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.

When they are retrenched, people can easily find themselves defaulting on payments. This can result in impaired credit records. However, if basic money management principles are followed, this situation can be avoided.

Below are some tips to consider to ensure that you have some financial buffer in place should you be impacted by retrenchment:

1. Credit or income protection insurance
   People who have taken up 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 if you are retrenched. However, it is critical to research your options and weigh up the various benefits.

2. Obtain financial advice
   Get yourself a financial adviser who will guide you through the decisions you need 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.

3. Protect your retrenchment package
   Resist the temptation to spend all your retirement 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.

4. Protect your risk
   If you have group life cover, check whether it provides you with a continuation option. A continuation option allows you to retain the life cover without undergoing medical underwriting.

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.

5. Check what other cover you have
   If you have debt such as a short-term loan, credit card or even car finance, there is a good chance 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.

Credit life policies are often included with home loans, car loans, and other credit agreements, and 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, so that if you are retrenched, the debt covered by the policy will be settled.

6. Note the regulation change
   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 is restricted to retrenchment cover, are able to claim where they have not been retrenched but are unable to earn an income for various reasons.

WRITTEN BY LEE BROMFIELD

• Lee Bromfield is the chief executive officer of FNB Life.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)