Choosing life insurance can be really confusing. There seem WAY too many choices. So we’ve broken it down into four easy steps:
When you die
- Choose how much you need – we looked at the four reasons you need life insurance in a previous blog. Make sure that the amount increases with inflation. If you need R20,000 per month now, you’ll need at least 6% more next year to buy the same stuff.
- How long do you need it for? – is this needed to cover school fees until the children are 18 years old (known as term cover)? Or is this for whole of life ?
- Will it be paid as a lump sum or monthly? – this depends on whether your spouse or beneficiary is able to handle investing money. If they can manage inflation and investment risk to make sure that it can grow at the right rate for e.g. 18 years (and won’t spend it on a new car), then lump sum is fine. Otherwise, make sure you get a death income benefit that pays a defined amount each month (and increases with inflation).
Whilst you’re alive and paying for it
- Premium pattern – your premium is the amount of money you pay each month for life insurance.
- When you’re 20, you are less likely to die than when you’re 90. So the first option of premium is called Age Rated. You pay according to the risk of you dying – so you’ll pay a small premium in the beginning, but in your retirement when you need your life insurance the most, each year your premiums will increase dramatically. Be careful of this – people sell it because it looks like you’re getting the same amount of insurance for a lot less money.
- A level premium – you pay the same amount each month, regardless of whether you’re 20 or 90. So in effect you overpay when you’re young, and underpay for the risk of dying when you’re older – when you need lower expenses the most.
- A fixed percentage increase – you choose to smooth the curve over time by overpaying a little in the early years and underpaying a little in the later years. This is fine for fixed term cover when you know your salary is going to increase a fixed percent each year.
Life insurance can be a reasonable chunk out of our monthly expenses! Make sure you use spend that money wisely, and don’t end up needing to cancel your policy when you’re 60 and need it the most because it’s costing you way too much.