Life assurance is the most overlooked aspect of financial planning, though almost everyone needs this type of cover.
Most people's realisable assets, as opposed to lifestyle assets, are so small that the money will never adequately provide for financial dependents.
Life assurance products have changed significantly in recent years. The new products are much simpler because they provide cover in the event of death, but not all the fancy frills of previous policies.
Families need to determine together how much capital the breadwinner will need to provide in the event of premature death. This should include funds to repay debts and sufficient income to cover all expenses, such as medical aid, education and family events, as well as large capital expenditures for a new car or improvements to a home.
But before you make these calculations you need to understand the effects of inflation on capital and income, as well as the tax implications on interest earned from money invested in bank and money-market accounts.
The Rule of 72 is an easy way to calculate how quickly money doubles or halves in value: simply divide the rate of interest into 72.
If you want to calculate how long money takes to double at an 8percent interest rate, then 72 divided by 8 equals 9. So R1000 invested at 8percent will be worth R2000 in nine years.
Similarly, if you want to calculate how the purchasing power of capital drops, divide the rate of inflation into 72. Assuming inflation is 6percent, then 72 divided by 6 equals 12, which means that what you buy for R1000 today will cost R2000 in 12 years.
Life assurance products may include additional benefits, such as cover for disability and dread diseases. The new life assurance products even offer choices that do not necessarily include life cover.
People with high earnings might not need life cover if they have no dependants, but they could well need disability cover in case they are injured or become sick. The cost of this cover will depend on the type of work they do.
Keep in mind that every aspect relating to your health needs to be disclosed when taking out risk insurance. Fail to do so and the payout might be declined on a small technicality that did not seem important at the time of taking the policy.
Each person's circumstances differ, but spouses should together evaluate how much and what types of cover is required.
We always think disaster will never happen to us or our spouses, but look around to see that misfortune can afflict anyone at any time.
Who will look after your family if you have not adequately provided for them?
lBryan Hirsch is chief executive of Pioneer Financial Planning. Visit www.pioneer.co.za for more information