Most people see life insurance cover as a grudge purchase. But consider how your spouse and children will suffer if you die and they lose your income…
You probably resent having to pay premiums every month and, although some new generation products offer some of the premiums back in one way or another, you believe you won’t live to see the benefits of these premiums.
Life cover therefore is the first thing to go if you run into financial difficulties. What you don’t realise however, is that if you don’t have this cover, your dependents won’t have the money to pay for the expenses that are deemed to be more important, such as DSTV.
Life insurance cover should be part of your comprehensive financial plan
Life insurance should not be seen in isolation, but should form part of a comprehensive financial plan, which will include retirement planning, investment and savings planning, risk planning and estate and succession planning.
What you don’t realise however, is that if you don’t have life cover your dependents won’t have the money to pay for the expenses that are deemed to be more important, such as DSTV
Life insurance will cover any shortfalls in the other areas of your plan, as well as relieving the financial burden on your dependents. It should be reviewed each year at your annual review with your financial planner.
Ideally, one should take out life cover as soon as it becomes necessary (i.e. as soon as you accumulate debt or have dependents) and the younger you are, the cheaper it is.
I believe these are some of the more important reasons for having life cover:
1. Protecting your future income
In the event of your death, the income that you would have earned for the rest of your working career will suddenly cease. In most instances this will have a devastating financial impact on your dependents, not only in the short term but also in the long term.
For example, assume you are 30 years of age, your normal retirement age is 65 and your current monthly income is R20 000. Assuming that your income increases at the rate of inflation and doesn’t take into account any promotional increases, bonuses etc. your family will lose out on a minimum of R28,6 million of income over your working life.
2. Children’s expenses
If your children are still at home, life insurance will cover the financial burden of their schooling and tertiary education.
Assuming the monthly cost of school fees is R3 000, increasing annually at the inflation rate, the capital cost of these school fees over a child’s school career will amount to approximately R635 000 per child. This does not even take into account other expenses such as books, school uniforms and school outings.
We all have debt, be it the bond on your house, car debt or credit card debt, and this can run into millions of rands. Many institutions will call in the debt on the death of the principle debtor. Life cover will help in relieving this burden on your dependants by paying off this debt in the event of your death.
You should continually review your life cover to ensure it covers existing debt and any new debt you may have accumulated. You should also reduce your life cover as your debt reduces.
If you own a business, there are risks to the business and to your estate should you pass away. Below are some of the more common risks:
- Will your business partners have sufficient capital to buy your share of the business from the estate?
- What is the cost to the business as a result of your death?
- Have you signed surety on behalf of the business for business loans, which will need to be repaid on your death?
These are very real issues that can be solved simply by having sufficient life cover.
5. Estate expenses and liquidity
Unfortunately dying can be an expensive business. They say there are only two guarantees in life, death and taxes. Both of these apply in this case
Should your estate be worth more than R3 500 000 (and the combined estate of you and your spouse has a value of more than R7 000 000) you may be liable for estate duty. You may also be liable for Capital Gains Tax when your estate is wound up, as the transfer of your assets to your beneficiaries is deemed to be a disposal, and finally you will need cash in your estate to pay the executor who will be winding up your estate.
Many estates don’t have sufficient liquidity in them to pay these costs, as the assets are tied up in ‘non-liquid’ assets. The last thing you want therefore is for your executor to sell assets in order to pay these liabilities.
Life cover will solve all the problems I have mentioned above and is therefore a very important component of your financial plan. It will give you and your family peace of mind, that should you pass away, they will be able to grieve your passing without having to worry about present and future financial obligations, which could potentially cripple them.