When you first start looking at taking out life cover, the first question that comes to mind is ‘How much life cover do I need?’
The answer is that your life insurance needs will depend a huge amount on your individual circumstances, your family situation and your lifestyle. So how much life cover is enough? R100 000? R500 000? One million? Ten million? Here’s what you should consider when you’re trying to find out how much life cover you need.
If you were to pass away, the likelihood is that your life insurance would be used to take care of your dependents: your spouse, kids or even nieces, nephews, siblings or elderly relatives. Without life insurance, they would be financially responsible for themselves. Of course, the more dependents you have the more life insurance you need. If it’s only your spouse who you’ll need to provide for after you’re gone, then you could take a lower amount than if you have three kids who you’d like to provide a tertiary education for.
If you still need to pay off a house, car, education fees, a credit card or any other debt then you’ll need to take enough life insurance to easily cover this. If you don’t, then your family would end up responsible for these debts if you were to pass away; not a financial burden that you want to leave on those closest to you! If your house and car is already paid off then you can take a lower amount of cover as your dependents won’t need to use the payout to cover debt.
Some employers, for instance, offer cover to their staff in the event that they pass away. While this cover is generally not sufficient in and of itself, it does mean that you can sometimes reduce the amount of cover you take out on a separate life policy.
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This is where knowing your financial habits comes in handy. If, for example, your family’s monthly expenses are R10 000 per month and you are saving another R2 000 for the future (e.g. for school fees, your kids’ first car or for your retirement) then you’ll need to replace your R12 000 per month until the age at which you planned to retire. Let’s say that you were planning to retire at 65 and you are now 40. That means you’ll need to provide at least R12 000 per month for 25 years (and that isn’t even including inflation!). This gives you a sum of approximately 3.6 million rand.
Of course, your beneficiaries would be able to earn interest on a large lump sum so this is just a rough calculation. It does illustrate that while one million rand or half a million rand might seem like a huge amount of money, it’s important to consider things in the long term.
Your life insurance will likely have to act as a salary replacement for those you leave behind, especially if you are the main breadwinner. For this reason, a good rule of thumb is to take your annual salary before tax and multiply it by 10 to end up with a ballpark figure of how much life insurance you would need to take out. You can generally reduce the salary by about 20% to account for the fact that living costs would be reduced by your absence.