How much life cover do you need?

When buying life insurance, how do you know how much is enough? Do you spend what you can afford, or do you opt for a nice round figure like one or two million rand? And how do you know whether it’s enough?

Marius Botha, MD at life insurer Stangen, says there’s no exact number: how much life insurance you need varies based on personal and financial circumstances. The good news is that you can work out how much you need by understanding the reasons why you need life insurance, and how this can help you arrive at your own personal number.

Settle your debt
This is the starting point for any life insurance calculation. Having debt means it needs to be repaid – and if you die suddenly, your bank will insist that all debts be repaid immediately, or your home and assets end up on auction. “Step one is to add up every cent you owe to anyone right at this moment: mortgage, cars, short-term loans.”

Pay estate duty (death taxes)
If you leave assets worth more than R3,5 million to anyone other than a spouse, it will attract estate duty. If you leave all your assets to your spouse, or the assets being left are worth less than R3,5 million, you can ignore this expense. Otherwise, have an Estate Plan drawn up by a Financial Advisor to determine this expense.

Pay executor’s fees
An often-overlooked expense is the Executor’s fees: the fees charged by an attorney to pay off your debts, liquidate your assets if necessary, and distribute them to your heirs. Even if there is no Estate Duty payable, your estate will still attract Executor’s fees of a maximum of 3,50% of the gross estate (excluding VAT). “On an estate of R5 million, that means an unexpected expense of R105 000. If you have no life insurance in place for this, assets will need to be sold to cover it. Factor this in when determining how much life cover you need,” says Botha.

Bridging finance for the surviving spouse
If you live in a two-income household, and one of those incomes falls away, would it create financial stress? Winding up your estate could take two years or more, and if there isn’t sufficient liquidity in the estate, you could find that homes are sold from under the feet of your loved ones. “It’s good practice to provide six months’ income in your life insurance for a spouse to bridge the adjustment period,” says Botha.

Meet future education needs
To calculate how much life insurance you need to pay for education, answer three questions: How much does tuition, schooling, books, uniforms and sports cost per year? How many years of schooling still lie ahead for your child? And by what percentage do those costs increase by every year? Now project that annual cost and add that to your life insurance figure.

Providing income for dependents
Do you provide your surviving spouse with a replacement of your lifelong income, or simply replace your income for a fixed number of years - until a youngest child leaves home, for example? Either way, work out your net salary after all deductions; remove the monthly expenses you’ve already provided in your calculations above; and you arrive at a rough monthly amount needed by your spouse.

“Now decide on the number of years that your spouse requires the income. On top of that, we need to factor in inflation, to allow that income to increase every year by anywhere between 5% and 10%. Now you will have a better idea of how much life insurance is needed to replace your income,” says Botha.