Life insurance is a difficult subject. Not only does it require you to consider your own mortality, but it also means having to put some sort of a value on what you are worth. It can be difficult to think about your family carrying on without you, but that is exactly what has to be done when thinking about whether you need life insurance and how much you might need. If you have anyone who depends on you financially, whether that is children, a spouse, parents or siblings, then life insurance is critical.
Why life insurance?
Life insurance guarantees that your death won’t leave your dependants in financial trouble. It’s not about paying for your funeral or having some money to buy something nice to cheer them up, but about ensuring that they can meet all their financial obligations without your income.
Particularly if you are paying off significant debts, such as a home loan or a car, it is worth making sure that those are covered by an insurance policy that can remove that burden. You might also need life insurance to cover the expenses of your estate.
When working out how much life insurance you need, consider:
- How much would I need to pay off all my debt?
- What are my monthly expenses, and how much would I need to create that income for my family at a drawdown rate of 5% a year?
- Will I need to provide funding for my children’s future education?
- Do I need to provide for the expenses in my estate?
However, life insurance is not something that you necessarily need to hang on to forever. Just as you don’t need to insure a car that you no longer own, you can outlive your need for life insurance. This would be the case if you satisfy three criteria:
- You and your spouse are independently wealthy enough and each has enough income to meet your debt obligations and sustain your standard of living. If either of you passed away, the other would therefore still be in a stable financial position.
- You have no other dependants. If your children are self-sufficient adults, and you are not responsible for any other family members, then your death would not leave anyone financially vulnerable.
- Your estate is either too small to attract estate duties or has enough liquid assets to meet the taxes and executor’s fees. In South Africa the first R3,5 million of your estate is currently exempt from tax.
Words: Patrick Cairns