Life insurance: the why and how
UNTIL YOU NEED IT
Most people treat life insurance as a grudge purchase. Unfortunately insurance is the one thing you don’t need, until you need it.
A 2016 Association for Savings and Investments South Africa study revealed the life insurance shortfall for SA income earners aged 15 to 65 is R28 trillion.
Life insurance doesn’t make sense for everyone. If you have no dependents and enough assets to cover your debts and the cost of dying (funeral, estate lawyer’s fees, etc), then insurance is an unnecessary cost for you. Likewise, if you have dependents and enough assets to provide for them after your death (investments, trusts, etc).
Since those are marginal minority in SA, this article is for the rest of us.
The thing is, while R1 million may sound like an impressive sum of money when you’re considering taking out life insurance, the question is, will it be enough to take care of your family’s needs over 20 to 30 years? If there are people who depend on you and your income, or if your significant debts outweigh your assets, you need life insurance.
Life insurance is about providing cash for the unavoidable expenses associated with wrapping up an estate and replacing the net income a family stands to lose over the longer term. When calculating your life cover requirements, take the following into account: your assets, liabilities, estate costs, number of dependents and how much you want each to receive. In my opinion, the starting point should be centred around loss of primary income.
If you’re the sole bread-winner, the amount of life-cover you choose should be enough to at least fulfil this requirement, ease your family’s immediate financial burden, cover essential future life expenses (such as children’s education) and guard against inflation. To err on the safe side, assume your policy’s lump sum payout is invested at 8%.
You can also opt for the life insurance to be paid as a monthly income to your beneficiaries. This is growing in popularity, as dependents aren’t burdened with having to invest and manage a lump sum or consider the uncertainty of future interest rates, or inflation. Such annuity benefits also pay out tax-free.
If there are people who depend on you and your income, or if your significant debts outweight your assets, you need life insurance.
An annuity income removes the ambiguity of how a lump-sum will be invested, at what costs, by whom and if it’ll generate a sufficient income to serve its purpose. Importantly, the income payments are payable until the life insured would have turned a certain age, which is selected upfront, and not indefinitely. This age can be selected to be as low as 55 or as high as 90.
Insurance cover isn’t static. Your changing personal circumstances, as well as external factors will impact the cover’s sufficiency. Revisit your life insurance needs analysis at least every two years and select an insurance policy that affords you flexibility to amend your cover as you need to.