How much life insurance is enough?

The answer should be ensuring the continuity of the lifestyle that has been provided

WHEN considering how much life insurance is enough, the answer should be less about what the premiums the policyholder can afford and more about ensuring the continuity of the lifestyle that has been provided for a family after the passing of the main breadwinner.

Finding the correct balance between affordability and suitability can be challenging.

It is important to remember that a life insurance payout is used to cover a number of expenses. It must first be able to cover all once-off costs, such as debts and estate duty, before providing your family with an income that will allow them to maintain their standard of living.

Consider a breadwinner earning R30 000 a month. Although life cover of R1 million may seem a lot, R1m of life cover today might produce a monthly income of about R5 000, which would be far too little for the family to sustain their current lifestyle.

Furthermore, there are various important milestones that, once reached, will necessitate a review and possible readjustment of your life cover requirements.

As you progress through life, your life cover requirements will change – usually becoming more demanding as the number of people depending on your increases. These milestones include the highs and lows of life and the events for which we may not necessarily plan but could nevertheless experience.

Here are most common milestones, and how each one may affect your insurance requirements:

◆ Employment. When starting your first job, the most important thing to protect is your greatest asset, which is your ability to earn an income. The best way to do this is by taking out a simple income protection policy. At this stage in your life, a life policy may not be necessary if you do not have any dependants or debt.

◆ Marriage. Getting married is a fantastic milestone in anyone’s life and comes with much joy, but also a lot of responsibility. If you have a policy in place, this is a crucial time to review it with your financial adviser. The three key products on a risk policy to consider during this period of your life are income protection, critical illness and life cover.

◆ Children. Starting a family is often considered to be the milestone that will have the greatest impact on your insurance needs, as you are going to be fully responsible for the well-being of a child. If you have life cover, ensure that the child is added to your policy, and reassess the amount provided for according to the amount of income that your family requires to maintain their standard of living.

◆ Promotion. A promotion often comes with a salary increase, which usually allows for a better lifestyle, but may also mean increased debt such as a nicer car or better home. It is, therefore, important that you ensure your cover stays relevant to protect you and your family against any unforeseen events.

◆ Separation or divorce. While usually an unplanned milestone, in the event of a separation or divorce, a lot of people might not want their ex to benefit from their death. As long as you are the owner and life assured on your policy, you can contact your insurer, which will assist you with making the necessary beneficiary changes to your policy. There are many things to consider during this process, one of which are your children. You may want to consider keeping your life cover at a level that can comfortably cover your alimony costs or ensure that there is an income paid towards your children for future expenses.

While nothing in life is certain and things don’t always go as planned, sound financial planning is key to realising life’s goals, and being free from worry. Regardless of what path you end up taking, life cover provides you with peace of mind.