When you have people who depend on you financially, life cover becomes a crucial part of your overall financial plan. But thinking about these issues at a young age can be a little overwhelming, and it’s difficult to figure out the right level of cover.
A reader, Kelly, found herself facing this issue. She wrote: Do you perhaps have any advice on how I can determine how much life cover I would need? I’ve spoken to various advisers from insurance firms and they have all given me a different amount. I just want to have sufficient cover – not being over insured or under insured. I am in my twenties, married out of community of property with accrual, and my only dependent is my spouse. I have no assets (only my job).
We asked financial planner Terence Tobin of Rich Ideas for his advice.
For someone in their twenties, married with no children, their most valuable asset is their ability to earn an income. Most of us have the potential to earn millions of rands in our lifetime, so we need to protect that ability. Should something happen to us that prevents us from physically working, at least we know we won’t suffer financially.
You should make use of an independent financial planner to help you work out what exact amount of cover, based on your specific needs is ideal, however here is a rule-of-thumb guideline which might help.
I use LIFE in life cover as an acronym, for determining how much lump-sum life cover you might need. This stands for Loans, Income, Funeral, Education. This also works very well with regards to disability cover, both lump-sum benefits and income replacement benefits.
Firstly, we need to ensure all debts (loans) are settled at the time of death. Include all short-term and long-term debt, debt to family, debt to SARS (such as estate duty) and other death-related expenses at this point.
This is your most valuable asset and should be protected no matter what age you are. If you become unable to earn or generate your income (whether that be a salary, commission or part-time work), you and your family will still have expenses that must be paid. You would require an income to cover those expenses.
Therefore, we need to calculate the income replacement you and/or your family will need should you not be able to provide this due to illness, injury, disability or death.
Factoring in inflation and investment terms are key to this calculation too. Also, you might have debt you want to settle, due to an illness or injury, and a lump sum from disability is exceptionally helpful to pay that off, as well as to modify a lifestyle, like buying assisted medical devices, or modifying your home to put in wheelchair ramps or other support aids.
We must also cover funeral and death bed costs, so that our families won’t have to incur heavy costs to bury us. These costs can include the ceremony, the coffin, related funeral services and perhaps the “tears party” thereafter. This can form part of your life cover or could be a separate funeral product.
While you may not yet have children, you will need to increase your life cover to provide for your children if you do have them.
One way to do this is to include “future cover” in your current life cover policy. This means you can increase your life cover at a later stage without underwriting.
When deciding how much insurance to provide for your children, you will need to consider the cost of their education as well as “life starter funds”, which is the terms used to describe using life cover as a way of passing on some generational wealth that helps your kids with starting their lives.
This could include a car, perhaps a deposit on a home or even contribute to their wedding one day. Here you can opt to have the insurer pay out the life cover as a monthly income, instead of a lump sum, if you so prefer. There are a number of benefits to this.
Different baskets of life cover
Consider having different baskets of life cover and disability cover on your policy to cover each of these needs. They have different requirements for increases, investment terms and you also want to ensure that the premium patterns you select are sustainable and suitable for your individual needs.
For example, if you have children, the cover only needs to be in place until they reach a specific age.
A good financial planner will consider all of the above but also your affordability and ability to meet other financial goals, such as retirement.
This article first appeared in City Press.