Question:
How do you decide how much life insurance you need? A broker will always try and sell you the biggest policy he thinks you'll buy, since he's making commission on it. Is there a calculation you can use to get an idea of how much is enough?

Answer:
The calculation you use to work out how much life insurance is quite simple. The rule of thumb is 10 times your annual earnings plus your debt. So say for example you earn R200 000 per year and you have debt totaling R500 000, you would need R2.5-million in cover.

The problem, or rather complication, usually comes in when the broker tries to sell you a policy that has an investment component to it.

For example he or she will suggest that you include X amount as a savings portion to your policy. So after 20 years (or when the term of your policy ends) you will get the money back.

However, beware of this: you should rather keep your investments separate from a life policy as the returns are usually below average.

In addition, let's say you accumulate R100 000 savings in the policy, and you die, your heirs will only get back the life component, while the insurance company will usually keep the investment proceeds.


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