When you sit down to calculate how much life assurance and disability assurance you actually need, Sneddon advises that you consider the following:
- What is the financial risk at death? For example, if you are the sole bread winner and have a spouse with two young kids as well as some debt, such as a home loan, you would probably want your spouse to be able to settle the bond and then to be able to replace your income for the next “n” years while the kids are still at home. It is reasonable to expect to be able to generate 5% on capital for at least 30 years, so you either increase the amount of cover to match your needs or you reduce the term and consider the consequences (you could draw 10% for around 11-12 years before the capital is depleted).
- Balance the need or desire for cover with your ability to afford it. There is no point to taking out life assurance worth R10 million if you can’t afford it. You need to be pragmatic and take what you can afford – some cover is better than nothing.
- When re-assessing and changing your life assurance, make sure that you update your will at the same time.
- Consider the financial risk at the event – both for the immediate short term and for the rest of your life. In terms of disability cover, income replacement cover is probably the most reliable form of insurance, Sneddon says.
- Remember too that you can only replace 75% of your income. This is international best practice although some companies seem to have increased their limits.
- Take the cover that you can afford/need. If you are a salaried employee you don’t need a seven-day waiting period on your income replacement cover – as a rule, the longer the waiting period you take, the cheaper the premium.
- Remember to watch out for over-insurance – you can buy as much as you like but come claim stage, the insurers will aggregate your income (from all sources) and pay only the shortfall.
This article was first published in City Press on 8 December 2013.