Life cover changes at milestones

2014-06-08 15:00

When it comes to choosing insurance, there is no one-size-fits-all solution

Contrary to popular opinion, life insurance is not something you take out once and then simply pay premiums for.

The truth is that your life insurance needs change during the different stages of your life and this means you need to review your life cover regularly.

This is one of the main reasons you should consult your financial planner at least once a year or whenever you experience a milestone such as getting married, buying a home or having a baby.

Nicholas van der Nest, the director of risk product innovation at Liberty, points out that an insurance gap study commissioned by the Association for Savings and Investment SA (Asisa) revealed South Africans were currently underinsured by R24?trillion, of which R9.3?trillion is attributed to life assurance gaps.

“The Asisa figures are particularly concerning when one considers the number of families that do not have any or sufficient life or disability cover. We

are challenging young adults to take the financial future of their families seriously by offering them a kick-start with free life cover worth R25?000 for a year,” he says.

Van der Nest says once you have dependants or own a major asset, such as a house, you need to think about the financial implications your death will have on your family.

If you have just taken out a home loan, it is quite likely the banks have offered you a mortgage protection policy. This policy offers decreasing cover as you pay off your bond and at the end of the home loan, the mortgage protection cover simply falls away.

A life insurance policy on the other hand will cover the bond if required and will still pay out to your beneficiaries if the bond has been paid off.

Changing needs

The following three case studies show how different milestones affect your life insurance needs:

The first-time homeowner

Lungile Tshabalala recently bought a home for the first time. The house cost R450?000 and Lungile still owes R410?000 on the home loan. Lungile’s family members stay with her and she wants to make sure the loan will be paid off if she dies. She has taken out R410?000 life cover to make sure the loan will be paid off.

New parents

George and Mbali Khumalo recently welcomed their new baby, Victor, into their lives. George has decided he would like to take out additional life cover so if he dies before Victor finishes school, the life insurance can cover the cost of school fees.

If George takes out life insurance for R250?000, he can ensure his family will receive a monthly payout of R1?500, which increases by 6% a year for about 15 years, to help pay for Victor’s education. This calculation assumes the life cover payout of R250?000 is reinvested and earns interest at a rate of 7% a year.


Gloria and Lucas Hopewell are newlyweds and Lucas is the sole breadwinner. To provide for Gloria with an income of R10?000 a month, increasing at 6% a year for 20 years, Lucas will need to take out cover worth R2.1?million. The calculation assumes the payout will be reinvested and earn interest of 7% a year.

Calculating how much cover you need

The amount of life cover you need is unique to your personal circumstances and is not a random figure. This is what you need to take into account:

1 Work out what monthly income your family will need after you die.

If you are married with children, this can be split into two phases. The first phase will be when your children are still dependent on your spouse and live at home. The second phase will provide only for your spouse once your children have grown up and are earning their own income.

2 Calculate your total debt. This includes your home loan, car loan and any other debt you may have. If you have purchased credit life assurance, you may exclude this amount from your life cover calculation.

3 Funeral costs. Unless you have a funeral policy in place, your family could face high funeral costs when you die.

4Estate taxes. When you die, your estate has to pay estate duty at a rate of 20%. Currently, the estate duty tax exemption is R3.5?million.

This means you will not pay any estate duty on the first R3.5?million in your estate (bear in mind that your estate includes any properties you own, all investments, your bank accounts, etc). Estate duty is then levied at 20% of the net estate above R3.5?million.

5 Capital gains tax (CGT) is also due when you die. CGT is calculated as though you had sold all your assets at market value on the day you died. The capital gain is the difference between the base cost of the asset (what you paid for it) and the market value on the day you died. Any assets left to your spouse are exempt from CGT and it is postponed to the date of their death.

6 Executors’ fees. This will usually cost you 3.5% of the value of the assets in your estate or everything you own, plus VAT. So the total executor fee can be as much as 3.99% of all your assets. If you appoint an executor before you die, you can negotiate this fee down but make sure

you have an agreement in writing.

Calculating your life assurance needs is not a simple matter. You should consult a financial planner to ensure your dependants are properly provided for.

When you compare different life cover quotations, make sure the level of cover increases with inflation. As the cost of living increases, your family’s income requirements will increase too.

For example, if you take out life cover worth R3.2?million now, in 19 years that life cover value should have increased to keep pace with inflation. If you assume inflation to be 4% a year, in 19 years, your life cover should be worth R6.6?million.

Liberty offer


To qualify for free life cover of R25?000 for up to a year with Liberty, you must fall into one of three groups of people – newlyweds, new homeowners or new parents.

Registration does not require health screening. Apply online at

How much will the monthly premiums cost?

As an example of what premiums you can expect to pay for life cover of R2?million, Liberty used the following assumptions:

.?Nonsmoking male aged 32; degree qualification; earns R35?000/month.

.?Your premiums will increase by 5% a year for a set level of cover.

Your monthly premium for R2?million will be about R270.

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