How much life insurance do you really need?

2016-10-13 06:00

IT’S pretty easy to work out how much life cover you need simply to cover your existing debts.

But where things can get complicated is when you try and calculate how much you’d need to replace your income.
Here is how most people do their calculations:

Step 1: They take their monthly salary and multiply that by 12 months. For example, R20 000 a month x 12 months = R240 000.

Step 2: They take that figure and multiply that by the number of years they’d like to provide income for. For example, R240 000 x 20 years = R4.8 million.
But doing your life insurance calculations as simply as this, doesn’t take all of the following into account:

1. Do you use your “before” or “after tax” income to do your calculations?

2. Have you factored in inflation?

3. If you invest that money at a bank, wouldn’t the interest be taxable?

4. And wouldn’t that extra interest earned mean that you need less life cover?

5. Do you have any liabilities?

6. Do you have dependants other than your spouse?

You will see that your calculation is not that simple anymore.
Let’s look at problem number 1 -

The first thing to remember is that your income disappears when you die. Therefore, it’s no longer about paying tax at your rate, but rather about paying tax at your spouse’s income tax rate.

So, what’s the solution?

When doing your life insurance calculation, you must work with your after tax income and then inflate that by your spouse’s tax rate. The problem now, though, is that your spouse’s tax rate is going to jump. This is for the simple reason that he or she now has your income added on to their current income. But for now, let’s work on your current after tax income as our answer to problem one.
What is insurable interest?

Are you thinking of taking out life insurance for someone other than yourself? While this may sound strange, there are many reasons why you may want to do this. The next logical question is: “Are you entitled to insure someone else’s life or possessions?”

In insurance law, the answer to this can be summed up perfectly in two words: insurable interest. What this means is that in order to claim successfully from someone else’s life insurance policy, there must be an insurable interest between the insured and the insurer.

Another way of looking at this is to ask the question: “Would the insured suffer a financial loss should they lose an asset because of theft, destruction, or on the death of the life insured?”

When it comes to car and home insurance, this insurable interest cannot be greater than the actual value of the asset. But how do you measure the value of a human life? The only way to find out is by calculating what the financial losses would be if that person passed away.

Insurable interest must also exist at some point in time in order to have a valid life insurance claim. For instance, with car and home insurance, an insurable interest must exist at the time of claim. With life insurance, the insurable interest must only exist when the life cover was taken out.

Parts of this article is an excerpt from Think Money.


The information is only intended to be of a general nature and should not be relied upon by any part without obtaining full details from a licenced financial service provider.

Please contact your financial adviser/ broker for further information. You could also contact me on 083 399 3905, my office on 032-944 3051 or e-mail me on for an appointment.

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