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How much life insurance cover do you really need?

Its all Insurance

Posted on Monday, May 16, 2022

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Nobody likes to think about death, there’s not much we can do about our mortality, but we do have a say over what we leave behind for our loved ones. By putting the right plans in place now with life insurance cover, we can ensure those we love are taken care of when we are no longer around. 

What is life insurance cover?


Life insurance is a contract between you and your chosen life insurance provider. You pay premiums every month so that in the untimely event of your passing, the insurer pays a lump sum of money to your named beneficiaries. 


A life insurance payout supports friends and family through significant events. For those dealing with the grief of your passing, immediate costs associated with organising a funeral and other such remembrance activities will not be a financial burden.


Your financial foresight and generosity can also support your family with future events such as university tuition, paying for a wedding, or a down payment on a house. 

What does life insurance cover do?


As well as providing your family with financial security, life insurance can also support you when you are unable to earn a regular income. 


In the unlikely event that you are incapacitated through accident or disease, you’ll want to have severe illness, terminal illness, and or disability cover.


Unfortunately, cancer diagnoses and other severe illnesses are all too common. If you are diagnosed with a health issue, this type of cover provides financial support towards medical expenses and general day to day costs. The way it works is by prematurely accessing a portion of your death benefits. 

Why do you need life insurance?


If anything, 2020 and 2021 reinforced the unpredictable nature of life. According to Bloomberg, life insurance firms paid out approximately R47,6 billion rand in claims due to deaths related to the Covid-19 pandemic. 


The last thing you want is for your spouse, children, parents or any other loved ones to be without when you are gone. Life insurance gives you peace of mind to live every day as carefree as possible, knowing your families' future finances are covered.

When life insurance policies don’t pay out


There are some situations to be aware of when an insurance provider will not pay out. 


Fraud - If your insurer discovers you misrepresented something in your application, a payout claim may be denied to your beneficiaries. 


Criminal activity - No payout will be made if the policyholder passes due to committing a crime.


Risky activity - Some policies will not pay out for a death caused by dangerous activities such as rock climbing or piloting. It is best to check with your insurer if risky activities, including hobbies and jobs, are covered.

How to calculate the life insurance cover you need?


When working out the minimum amount of life insurance you will need, there are many factors to consider. A life insurance policy should be able to cover any debts you may have, plus interest. It should also be able to replace your income taking inflation into account. 


Many financial experts recommend purchasing 10 to 15 times your annual income, but this differs from family to family. It’s better to look at all your needs and then subtract the assets your family could use in your untimely passing.


For instance, take Simon, a 45-year-old married man with three children under the age of 10. His gross salary is R50000 a month, his savings amount to R100 000 and he has outstanding finance remaining on his car of R30 000. When working out his life insurance needs, Simon needs to consider all these factors, including the future school fees such as his children's university education. 

A life insurance cover calculation you can do now


Here is a simple calculation to help you work out what life insurance cover you need:          

 X       -         Y             =        TOTAL  INSURANCE PAYOUT 


(Financial obligations you want to cover) - (Existing assets) =

Your financial obligations might include but not be limited to: 


  1. Income replacement: multiply the salary you want to replace over several years. 

  2. A mortgage: include the balance of your bond. You don’t need to add this if your income replacement above is enough to cover the mortgage. 

  3. Other debts: include debts such as car repayments or private loans.

  4. Children’s education fees: include tuition money so that school or university fees can be paid.


Existing assets can include but not be limited to: 


  1. Existing life insurance: if you have any other life insurance policies, you can subtract that amount. Be wary of including a work-life cover as this won’t carry forward if you leave your job. 

  2. Existing savings: any savings you may have can be used to pay for expenses. This can also include unspent retirement savings. 

  3. Educational savings: if you have an unspent education fund, this can be subtracted from your life insurance needs. 

  4. Funeral expenses: If you have separate funeral insurance, you do not need to include this in your life insurance. 

Where to find the best life insurance policies in South Africa?


There are various types of life insurance policies in South Africa, and the one you choose will depend on your individual needs. Contact Budget Insurance today and let our experts help you answer any questions you may have.