Plan your life cover carefully

I'M regularly asked the following question: How much life insurance should I have?

I'M regularly asked the following question: How much life insurance should I have?

Many of us have difficulty in understanding how much life insurance is enough to protect our loved ones in the event of premature death.

Two significant changes have occurred over the past few years that have resulted in a need to re-assess your life cover.

lInterest rates have come down and the amount of capital required, to provide the same income, has now dramatically increased in comparison to the income received when interest rates were higher.

lTraditional life assurance products have been radically revamped. The new products are much more complex and there is a great deal more to them than mere price.

There are definite critical circumstances which you will need to provide for in the event of premature death.

lEducation - it is not difficult to calculate how much you need to set aside to provide for your children's education. For example, if you have two children aged 4 and 6 at a government school, the current cost of education is R15000 per annum per child. You can calculate, using a 10percent inflation rate, how much capital you would need to invest, to pay for school fees.

You would need the capital amount that is invested for the term of education, and each year you would draw from this investment to pay the fees.

Based on the 4 and 6-year-old scenario, who are going to do a 4-year degree in 14 and 12 years time respectively, I would estimate you would need approximately R800000 today invested at 8percent to cover the cost of education.

New generation insurance companies understand the problem relating to education and have developed very sophisticated ways of catering for this expense.

lDebt - it's essential that all liabilities are paid off. This is a known amount and therefore you can take insurance to cover this in the event of premature death.

lFuture living expenses - this is where the difficulty lies because of future inflation. However, today, financial advisors have such sophisticated models that they are able to calculate how much one needs to invest, to provide sufficient income for your family for many years to come.

In order to calculate what income is required at the outset, you will need to exclude from your monthly budget all those expenses which, in the event of death, will no longer be part of the budget. Education and debt have been catered for separately, as well as the costs of life insurance, disability and your retirement savings.

You will find that your annual expenses will probably be 40percent lower because so many expenses would have fallen away.

A person needs to ensure against events which would have a detrimental effect on their finances. Remember that everyone's circumstances are different and spouses need to discuss and evaluate how much life cover is required.

lThe writer is financial adviser of Bryan Hirsch Colley & Associates, email or helpline 011-880-4888.