Do your­self and your fam­ily a favour and check your risk cover

COVER CAL­CU­LA­TION GUIDE

Weekend Argus (Saturday Edition) - - PERSONALFINANCE - 1. Cal­cu­late the in­come re­quired each year 2. Cal­cu­late the cap­i­tal needed to gen­er­ate that an­nual in­come

o your­self and your fam­ily a favour to­day (not tomorrow – to­day) and check whether you have suf­fi­cient risk life as­sur­ance. In all like­li­hood, you do not, par­tic­u­larly if you are younger and are a mid­dle- to up­per-in­come earner.

This year, it is ex­pected that 166 729 (456 a day) South African in­come earn­ers will die and that 55 000 (151 a day) will be per­ma­nently dis­abled.

Most South Africans die be­fore they reach the age of 50 – that’s quite a scary statis­tic. The main rea­son is Aids and re­lated dis­eases. Road ac­ci­dents, vi­o­lent crime and dis­eases claim an in­or­di­nate num­ber of lives and leave many peo­ple per­ma­nently dis­abled and un­able to earn a liv­ing.

It is im­per­a­tive that you buy risk life as­sur­ance if you have depen­dants and do not have suf­fi­cient sav­ings to pro­vide for them if you be­come dis­abled or die pre­ma­turely. Life as­sur­ance that pays a ben­e­fit on death will en­sure that your depen­dants can main­tain their stan­dard of liv­ing. And it is even more im­por­tant to have as­sur­ance against be­com­ing dis­abled as a re­sult of a se­ri­ous ill­ness or ac­ci­dent.

It is a sad fact that most bread­win­ners’ depen­dants will not be able to main­tain their stan­dard of liv­ing af­ter death or dis­abil­ity, be­cause very few will have taken out any, or suf­fi­cient, cover.

Our front-page re­port is about re­search un­der­taken by True South Ac­tu­ar­ies and Con­sul­tants on be­half of fi­nan­cial ser­vices in­dus­try or­gan­i­sa­tion, the As­so­ci­a­tion for Sav­ings & In­vest­ment SA (Asisa). The re­search shows just how se­ri­ous the sit­u­a­tion is.

Most fam­i­lies will be forced to cut their monthly spend­ing by about a third on the death or dis­abil­ity of a bread­win­ner, Asisa deputy chief ex­ec­u­tive Peter Dempsey says.

I sus­pect that some peo­ple will dis­miss this re­search as a tac­tic by the life as­sur­ance in­dus­try to scare you into buy­ing un­nec­es­sary life as­sur­ance. If you are one th­ese gain­say­ers, do your­self a favour be­fore you turn to the sports pages of to­day’s news­pa­per and do a rough check on how much life as­sur­ance you need ( see “Cover cal­cu­la­tion guide”, above right).

DAnd if you take the re­search se­ri­ously, as you should, when did you last as­sess how much risk life as­sur­ance you need, or whether the cover you have ac­tu­ally meets your needs?

The im­por­tance of risk life cover is un­der­scored by ask­ing your­self two sim­ple ques­tions:

◆ What will hap­pen to me (and my depen­dants) if I am sick and/ or dis­abled and can no longer earn a liv­ing?

◆ What will hap­pen to my depen­dants if I die?

At dif­fer­ent stages of your life, you will need dif­fer­ent risk as­sur­ance prod­ucts and dif­fer­ent ben­e­fits. You con­stantly need to re­vise what and how much as­sur­ance you re­quire, par­tic­u­larly when your cir­cum­stances change – such as on mar­riage, the birth of a child, a death, di­vorce, re­tire­ment or even a pay in­crease.

If you do not re­vise your risk as­sur­ance reg­u­larly, it is highly likely that your cover will be out­moded and in­cor­rectly priced and will not meet your needs.

Risk life as­sur­ance has changed sig­nif­i­cantly over the past 50 years – and it is still chang­ing – but not ev­ery change may be in your best in­ter­ests.

Risk life as­sur­ance is not sim­ply a mat­ter of buy­ing cover of, say, R1 mil­lion that will be paid to your depen­dants if you die pre­ma­turely, or a sim­i­lar amount if you are dis­abled. It in­cludes cover if you are se­verely in­jured in an ac­ci­dent and are un­able to work for, say, 18 months, and if you con­tract a dread disease.

To get the best value for your money, you need to keep a con­stant watch on two main is­sues:

◆ Cost. There is lively com­pe­ti­tion be­tween life com­pa­nies, but be warned: cheap is not nec­es­sar­ily in your best in­ter­ests.

Last year, Per­sonal Fi­nance pub­lished re­search un­der­taken by True South on be­half of life com­pany BrightRock that showed that choos­ing the pol­icy with the cheap­est pre­mium when you are young can be dan­ger­ous for your long-term fi­nan­cial se­cu­rity. The rea­son is that the cover is likely to be­come un­af­ford­able as you get older, be­cause the premi­ums will es­ca­late faster than the rate of in­fla­tion.

◆ Chang­ing needs. Risk life as­sur­ance should be based on your cir­cum­stances at a par­tic­u­lar stage of your life. For ex­am­ple, when you are young and have depen­dants, you need cover Here is a guide to how to do a very rough as­sess­ment of how much risk life as­sur­ance you should have: To­tal cur­rent house­hold in­come Less: In­come of spouse Pen­sion (in the event of death only) To­tal an­nual in­come re­quired Min­i­mum amount is 15 x an­nual in­come re­quired Sub­tract: Sav­ings and in­vest­ments R Re­tire­ment fund lump sums R Other life as­sur­ance ben­e­fits (in­di­vid­ual and group life) R Sub to­tal: R Add: Debt Spe­cial goals (for ex­am­ple, univer­sity ed­u­ca­tion) Amount that must be cov­ered by life as­sur­ance mainly to sup­port your fam­ily if some­thing should hap­pen to you. When you are older and richer, you may need life as­sur­ance to cover es­tate duty and cap­i­tal gains tax when you die.

It is not a mat­ter of as­sess­ing your needs once and then in­creas­ing the cover in line with in­fla­tion. De­pend­ing on your needs, you may have too lit­tle life as­sur­ance when you are younger and too much when you are older.

The “Cover cal­cu­la­tion guide” will pro­vide you with only a very

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Rrough idea of how much risk cover you need, and it is aimed at giv­ing you a wake-up call if you are un­der-as­sured.

The best way to as­sess your as­sur­ance needs ac­cu­rately is to have a fi­nan­cial ad­viser un­der­take a fi­nan­cial needs anal­y­sis.

A proper as­sess­ment of your as­sur­ance needs will take a wide range of fac­tors into ac­count, from your age and the state of your health, to the tax im­pli­ca­tions and the ben­e­fits paid by your re­tire­ment fund.

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