Question

We will be having our first baby shortly and I think it is about time that I took out some life insurance. How do I work out how much life insurance I should get?

Answer

The short answer is that you should take out enough cover to ensure that your family remains on the same financial trajectory that they are currently on even if they will no longer be receiving your monthly salary because you have passed away.  This is how you go about calculating it:

In the days before children, you’d need enough life insurance to cover

• any debt that you have
• your final expenses
• your contribution to the fixed household expenses.

This is generally not a large number

Once you have a child, things change and the number increases significantly as you would also need to cover the following:

• your salary until such times that the child is an adult and can fend for his or herself. I generally work on covering your salaries till the child turns 25. This is a big number that many people underestimate.
• any additional costs that your spouse would have as a single parent. These would vary from household to household but could include items like after care and transport costs
• you may also want to include cover for tertiary education for your child.

To give you an indication of the amount of cover you could need, look at the following situation.  The parent earns R40 000 a month and has a bond of R1m

As you can see, covering your future salaries for the next 25 years adds the most to your life insurance need.

As you get older, the number of years that you need to cover your salary for will reduce – so you could reduce your life insurance cover. This is why it is always important to review your finances each year.

Remember, if you have another child, the term for which you will need cover your future salaries would increase till that child is 25.

Insider tip

When you take out your life insurance, you can also purchase future cover. This will allow you to increase the amount of cover that you have without having to have additional medical underwriting in the future. 

As we get older, we often develop medical problems which could result in us being refused life insurance or getting cover at a much higher cost.  If you take out the additional future cover benefit, you would pay a small additional premium immediately but you would be guaranteed additional cover in the future.

Premium patterns

When you take out your life insurance, you need to understand why you’re taking it out and for how long you intend having the cover.

If you want to keep the insurance for the whole of your life, then you must make sure that you choose a premium pattern that is either level or increases by a fixed amount like 5%.  This will ensure that the cost of your life insurance does not increase by a lot more than your pension would be increasing when you retire.

The other type of premium increase is age rated premiums. The premiums would be cheap when you’re young, but they become very expensive as you get older. I generally find that from the age of 55, these age rated premiums double every six years.  This does cause problems for people when they retire, and they often have to cancel the life insurance because it becomes unaffordable.

So, if you’re young and just want to cover your risk for a limited period, then age rated premiums would work for you. However, if you want to keep the life insurance for the whole of your life and use it as a form of inheritance for your children then you should look for a level or fixed increase to your life insurance.

These principles should provide you with a decent framework to evaluate any life insurance proposals.