Question

The coronavirus has made me think about whether my family will be financially secure should I or my husband pass away. What if the unthinkable happens and both of us pass away? We have a fair amount of cover but do not know if it will be enough. Is there a way of determining how much life cover we really need?

Answer

Life insurance is there to ensure that your family carries on along the same financial trajectory should you not be around.

Under normal circumstances, your monthly salary will ensure, among other things, that:

• Your bond gets paid
• The credit card debt is serviced
• Your car is paid off
• The school fees are paid
• Funds are available to pay for university, weddings and 21sts
• If you die, the salary stops and these don’t get paid or are funded from life insurance.

Most financial advisers have fancy computer programs to work out how much life cover you need, but you can get a decent idea of how much you need by calculating the following four things:

1. The amount of debt that you have
2. The amount of money that your family needs to live on each month
3. The future eventualities that you would like to fund
4. Your final expenses

Let us go into these in a bit more detail.

Debt

Your debt is probably the easiest one to calculate. Here you would add in the latest balances of all the debts you have. This would include the bond on your home, your car loan, your overdraft, any Covid-19 loans and any store or credit card debts that you might have.

Monthly expenses

The monthly living expenses figure is in essence the current monthly budget for the family, with a couple of tweaks.

There are some companies that offer life cover that pays out on a monthly basis. This is a nice way of covering this need. It is also useful if your dependents are not that experienced in handling money.

If you want to find out how big a lump sum you need to cover these monthly expenses, a common rule of thumb is to take the monthly expenses figure and multiply it by 300. For example, if your family needs R20,000 each month, you would need R20,000 x 300 = R6,000,000 in life cover. (If you are interested in the maths behind this, it is based on a 4% annual drawdown that should be sustainable over the longer term.)

Future eventualities

We also need life cover to cover eventualities that may happen in the future. If you have young children you may want to ensure that there is sufficient money to pay for their university education, their wedding or a milestone birthday party. Here we would just add up these costs as if we were going to pay for them now and add that figure to the life cover amount.

Final expenses

These would include an amount for your funeral and the immediate costs of wrapping up your affairs. An amount of R20,000 to R50,000 would usually be sufficient here.

If you have more than R3.5-million in assets, you would need to make allowance for estate duty costs. If you fall into this category (and it is surprisingly easy to do so when you add in the value of your home), I would recommend that you speak to a financial adviser to see how you can reduce the tax payable here as well as to ensure that there is sufficient liquidity in your estate to pay these taxes without having to sell any assets.

Now that you know how much life cover you need, you need to see how much you have already.

Many people have life insurance that they don’t know about. If your company has a pension fund, there is a good chance that you already have group life cover. This is typically two or three times your annual salary. Look at any credit agreements that you have. In many instances, they will include credit insurance. Then look at all the insurance policies that you currently have. When you add all these together you will see if you have a surplus or a shortfall.

If you have a shortfall, I would strongly recommend that you make every effort to close this gap. Covid-19 is a reality. We need to have the right structures in place to ensure that our families can realise their dreams, even if we are not around.