Question:
My husband and I both have professional careers. We have the standard life cover that comes with our employer's pension policy and have a life cover to pay for our bond. Our first child is due in two months.

How does one decide how much additional life cover is needed, if any at all?

Answer:
Getting life cover has recently become a bit like finding a car guard at a shopping centre. There is no shortage of people wanting to provide the service, but making sure that your needs are met is a different question altogether.

Generally, life insurance should focus on providing two things: Meeting your liabilities if something should happen to you (meaning either passing away or becoming disabled) and making sure that your dependants will be able to continue their standard of living once you are no longer able to support them. It is important to understand exactly what these considerations imply. Once we have done this, the next question is simply what the most effective way will be to provide for it.

The first thing we need to understand is exactly what our liabilities are likely to be if something should happen to us. The big items tend to come to mind first. If you have a bond on your home, owe money on your car or have big debts elsewhere you want to make sure that your insurance will pay all of these first. The other types of liabilities that people often fail to take into consideration are those involved when settling your estate. These mainly revolve around your estate duty, executor’s fees and, indirectly, around your estate liquidity.

When we pass away our estate duty is calculated on the net value of our assets at the time of death. The first R3.5-million of these assets are not liable for estate duty. Any bequests you make to your spouse are also exempt (although for most of us this only means that they will pay estate duty on the assets if they should pass away at a later stage, so insuring your life for the estate duty on these assets makes sense either way). At present, your estate duty liability comes to 20 percent of the value of these dutiable assets. You will need to ensure that your insurance will cover this.

Executor’s fees are limited to 3.5 percent plus VAT (it comes to a total of 3.99 percent, or R39 900 for each R1-million) of the value of the assets that your executor has to deal with to wind up your estate (in other words make sure that the right people get the right stuff). Typically, the only assets that are not liable for executor’s fees are policies with nominated beneficiaries. For this reason we find that having some insurance in the form of life cover will not only ensure that you save on executor’s fees, which is not really a compelling reason to get life cover, but will also ensure that the proceeds from such a policy will not be tied up in the estate while it is being settled (a process that sometimes takes years). A life policy will therefore provide the available funds (liquidity) to make sure that the immediate needs of your dependants are met.

Meeting the above liabilities is not, however, the main reason why most of us take out life insurance. Our primary objective is to ensure that our dependants (spouse, kids, maybe parents, etc.) will be able to continue their standard of living. So what does this mean? Well, the good news is that you will probably not need to provide as much as when you are still alive. Because your debts should be paid off by your life cover, your bond- and car expenses can be subtracted from your monthly needs. Depending on your joint retirement planning with your spouse, you should also be able to subtract your retirement fund contributions.

You will also need to consider how many of your assets will be sold to provide for your family (your car, possible business interests and perhaps your investment portfolios all fall into this category). Lastly, you will need to consider how long you will need to provide this income for. There are two main issues at play here: Your kids should (hopefully!) become financially independent once they start working and your spouse may have enough retirement savings — especially considering that he/she will no longer have to pay for a bond — to support his/her retirement needs.

So once you are clear on what your requirements are going to be for the above and any other possible needs you may have, the only question that remains is how to provide for this insurance cover in the cheapest possible way. The cheapest form of insurance cover for most of us is our group life cover (if you are fortunate enough to work for a company that provides group death and disability benefits). If you have the option to adjust the level of cover you need, this is the place to start but be sure that you understand exactly what they will be charging. Also, be sure to check if this will be a taxable benefit. If it is, you could end up hugely under-insuring yourself.

Once you have explored your company benefits, you should provide life insurance for any possible shortfalls. The rule of thumb here is to pay as little as possible (so do your research!) provided that the cover does the job you want it to do. This means that comparing the price of different insurances is not the only consideration. Comparing the benefits is even more important. Exclusions, pay-out ratios and conditions covered are only a few examples of what needs to be considered.

From the above it is clear that there is a lot of information that needs to be considered if you are going to ensure that you have enough of the right kind of cover. Unfortunately, life insurance brokers mainly get paid in the form of commission based on how much insurance they can sell you. I would therefore advise you to speak to a proper financial planning professional and get the best objective, expert advice you can by rather paying a fee up front and less commission over time.

For further information about Capitec Bank, click here!

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