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How much life insurance do you need?
Adequate life cover can protect your family if you pass away unexpectedly.
Life insurance is an effective tool to include in your financial planning. When you pass away, life insurance can help settle unsecured debt and maintain liquidity in your estate. You can also cede life cover as security when applying for a loan. But most importantly, you need life insurance to be certain that your family will have an income and that assets are paid for in the event of your untimely death.
But how much life insurance cover do you need to make sure that your loved ones will be able to afford the same standard of living if you die? This amount will be different for everyone, because it depends on your personal circumstances and the assets and liabilities left in your estate. Are there enough financial assets in the estate to cover any outstanding debts like car financing, a home loan or store and credit cards, or do you have a separate credit life policy to cover your debts?
If the answer to those questions is ‘No,’ your executor will need to use your life insurance payout to pay off any outstanding debts first, and the remainder will go to your beneficiaries, which they can invest to provide them with a constant income. It’s always best to make a will, so your executor will know how you’d like to divide your life insurance payout and other assets between your beneficiaries.
Calculating how much you need
Let’s assume you’ve drafted a valid will, and you’ve also invested in credit life cover and funeral insurance, so your family is not faced with any extra expenses when you pass on. With credit life insurance to cover any remaining payments on debt, they will be able to keep assets like their home or your car. That way, the entire life insurance payout can go into an investment to pay your beneficiaries a regular income that helps them maintain the same standard of living.
The amount they will need to invest is the amount of life insurance cover you need – so it will depend on your individual family circumstances. As with most forms of insurance, the sooner you take out a policy, the better. It’s advisable to take out life insurance when you’re young and healthy, because your premiums will be lower. As a rule of thumb, you should consider getting life cover for an amount equal to 10 to 15 times your annual salary.
With the lump sum received, your family could invest in a tax-efficient vehicle that can give them good returns monthly
As you grow older, it’s likely that you’ll add various investments to your portfolio to take care of your retirement. You might also pay off the financing on assets like your home and your vehicles – these life changes mean that you may not need as much life insurance to leave your family well provided for. If you’ve neglected life insurance until you’re in your 30s or 40s, but you have invested in other assets, your loved ones may not need you to leave them as much to ensure that they’ll be well provided for, so you might choose to take out a smaller life insurance policy.
Get professional financial advice
With the lump sum received, your family could invest in a tax-efficient vehicle that can give them good returns monthly so that their lifestyle remains the same and your children can afford a good education. Investment options include living or guaranteed annuities, fixed deposits, endowment policies issued by long-term insurers, linked investment products, unit trusts and exchange-traded funds (ETFs – which, like unit trusts, are classified as collective investment schemes).
If you’re not a financial expert, you may find it hard to understand the details of all these options and how to choose the ones that best fit your personal circumstances. Seek expert help from a financial adviser. They will help you analyse factors like your debt position, your unique family obligations, and the relevant estate taxes they will owe on your estate, to work out how much life insurance you need. They will also be able to advise you whether to choose level premiums that remain constant for the duration of the policy, or escalating premiums that increase annually in line with inflation and age changes.
Learn more about wills, estate planning and Nedbank MyCover Life – life insurance that comes with extra benefits like funeral cover up to R100,000.
