Working out exactly how much you need is not that simple, which is why you need to get the help of a financial adviser or use an online tool to help you work it out.
Before you do either, there are a few things you need to think about so you can provide good information on which a calculation can be based.
Step 1: How much debt and credit life cover you have
The first step is to think about all the debt you have, such as a home loan, vehicle finance, a credit card or an overdraft.
Then consider whether, in the event of your death, that debt will be paid off by your credit life cover. If you do have credit life cover that will pay off the debt, you can take that debt out of the calculation.
If not, you should ideally provide for a lump sum that will pay off the debt in the event of your death.
Step 2: Consider your monthly income needs
The next step is to consider your and your family's monthly income needs without the debt repayments for the debts taken care of in step 1.
Also disregard your contributions towards retirement or your children’s education or other savings goals as these can be addressed in step 3.
If you have children, consider when each child will be financially independent and work out how many years it will be before your income needs reduce as your children reach independence and no longer require your support.
Also consider any other dependants – such as elderly parents – and how long they will need support.
Next work out your family’s monthly income needs without your own expenses – for example, you may have lower transport costs because you no longer travel to work and a two-car family may become a one car family. Food and clothing costs will reduce without your needs.
Any calculation of your life cover needs will need to provide for an income for your dependants that escalates over time in line with inflation.
Step 3: Consider your savings needs
Next you should consider your savings needs, such as your spouse’s need for retirement savings or for your children’s education needs.
Add up these savings needs and what you have already saved for them. The difference is what you will need to provide for through your life cover.
Online quotes and calculators take these factors into consideration to a greater or lesser extent. They may make assumptions for you on, for example, the cost of a child’s education.
The most accurate calculation is one a financial adviser should do for you based on your actual needs and your personal circumstances.
A financial adviser will convert the different amounts you need into a lump sum in today’s rands and recommend an appropriate amount of cover. He or she should also ask you what cover you already have in place possibly through your retirement fund or employer’s group life scheme.
Your adviser may also recommend a life policy benefit that will provide an ongoing income for your family, removing the risk that comes with using a lump sum pay out to provide an income for many years to come.
