Knowing how much life insurance you need often takes good planning with a Financial Adviser. But if you’re calculating it by yourself, think about the following:
4 elements you need to take into consideration:
- Liquidity – or access to cash. It takes roughly 2 years to wind up an estate, so the surviving spouse or children will need 2 years worth of cash. It’s not enough to have joint accounts as any account in the deceased’s name will be frozen. Life insurance pays out immediately, and bypasses the estate.
- Tax – Believe it or not, 20% of your estate is dutiable above R3.5m and you will pay capital gains tax of up to 18% on every asset that has grown since you last bought it. The tax man gets paid first.
- Debt – death is seen by lenders as breaking a contract, and so the deceased person’s debt becomes due and payable on death. So you need enough money to cover all debt due, and the estate needs to pay this after it pays tax.
- Ongoing Living expenses – if you don’t currently have enough money to pay school fees and living expenses, then you will need to provide for that through Life insurance.
Those are the must haves of life insurance. For some people, their life insurance is used as a legacy – to leave money for their children. And for that, it comes down to how much you can afford over and above your everyday expenses.
Once you know how much you need, read here for some guidance on how to choose your life insurance.