This is how you can calculate how much life cover you need?

Life insurance is necessary to pay off your debts after you die but you know how much life you need. Picture: Freepik

Life insurance is necessary to pay off your debts after you die but you know how much life you need. Picture: Freepik

Published Apr 18, 2024


When the budget is tight, life insurance is one of the first expenses that people consider cutting, especially when they have major financial commitments. But is this a good strategy?

Yaaseen Albertyn, the executive head of business and client solutions at Metropolitan, says cutting out life insurance when money is tight is not a good idea.

“Don’t be tempted to drop your life cover just because you don’t have any major debt that needs to be covered in the event of your death,” Albertyn said.

“Life cover doesn’t only protect your loved ones in death; it also looks after you and your dependents should you become critically ill or disabled and no longer able to earn an income or provide for your family.“

Another reason that life insurance is important is that it allows you to leave money behind for your family as a form of inheritance which can lead to generational wealth.

According to Albertyn, if you are planning on leaving an inheritance to you loved ones, you must also consider the tax implications.

The family might need some liquidity to access the inheritance without needing to sell assets to free up funds and this is where life insurance can assist, Albertyn said.

How much life cover do I need?

This is a question that may leave many people confused.

The rule of thumb is to take your annual income and multiply it by 10. This will give you a rough estimate of how much cover you should aim for. Keep in mind that this is a rough guideline and that this number may vary, depending on your age.

“For example, at around 65 years old, you might only need around five times your annual income in life cover, as you would (hopefully) have saved enough for retirement. If you are in your twenties, you might need twenty to thirty times your annual income because your dependents would be younger, and your income is expected to grow as you age,” Albertyn said.

When times are tough Albertyn shares a few things you might consider doing instead of dropping your life insurance.

Consider trading your funeral cover for life insurance

If you can only pay for one, you should keep in mind that many life insurance policies have a built-in funeral benefit.

This benefit can be used in the event of death to cover funeral-related expenses before the life insurance payout, which is subject to normal claims underwriting.

“However, make sure to check that your life insurance does indeed include a funeral benefit,” Albertyn said.

Look at decreasing your premium

Instead of completely losing your life cover, talk to your financial services provider or an adviser about decreasing your cover and paying a reduced premium.

“Many people even find that their cover needs have decreased over time – for example, many people increase their life insurance to back a bond, but once a house is paid off, you might want to look at reducing this,” Albertyn said.

If you are approaching or in retirement, check if your policy offers a cash-back or paid-up benefit

Some providers, will offer you a fully ‘paid-up’ benefit when you reach retirement age, allowing you to keep your cover but without any more premium payment.

Others providers will include a ‘cash-back’ type benefit that will pay out a lump sum as a bonus if you live up until a certain age and have paid all your premiums, Albertyn said.

“It’s worth checking in with your financial services provider if your policy offers this it might be a nice, unexpected windfall when you need it most,” says Albertyn.

IOL Business