In this article we will have a look at the main needs clients have for life cover and how life cover is used to cover these needs.
Every client’s needs are different, so the amount of life cover you need will differ on a case to case basis. Life cover is offered by all of the major insurers in South Africa and is the most common type of cover taken out by clients. It is mainly used to cover the financial implications of a person passing away. All companies offer a lumpsum benefit and some companies do offer a monthly income amount that is paid to a beneficiary for a selected term. Below are a few of the things to consider when determining the amount of cover needed to ensure the continuity of the lifestyle that has been provided for a family.
Debt
One of the first questions to ask is who does the family owe money to and which of those debts need to be covered if a family member should pass away. These debts should be covered at the outstanding amount with consideration for interest that might accrue during the finalization of the life insurance claim and winding up of the estate.
Income for a spouse and children.
What would happen if the main breadwinner in a family passes away? The main concern is that the income that family member provided to fund the lifestyle of the family will fall away. This has to be covered by a capital amount or a monthly “death income” benefit.
You also have to take into account the contributions of that person around the house. In some cases it will be necessary to appoint a nanny or a caretaker to replace that person’s non-financial contributions to the family.
Education costs are also essential to take into account as it does tend to increase significantly as a child gets older and education inflation tends to be higher than the standard CPI you would normally use as a guideline to determine future needs.
Liquidity and Immediate expenses
The impact of these costs varies greatly from household to household, but it could have severe implications on a family and their financial wellbeing.
It is important to provide for funeral costs and immediate liquidity. Fortunately, most companies offer an accelerated pay-out of life cover to cover some of these costs (usually limited to R50000).
One of the biggest liabilities to account for are the taxes and fees that might have to be paid from the deceased’s estate. Estate duty, Capital Gains tax and executor’s fees can all vary greatly from estate to estate. In many cases there is not enough liquidity in the estate to cover these costs. This could result in the beneficiaries having to sell off assets or properties to cover these unforeseen liabilities at a time when it might not be advisable to do so. It is also extremely important that you make sure that the beneficiaries on policies are updated, as there could be significant tax implications if this is not the case.
The amount of life cover that is needed will vary significantly over a person’s lifetime. It is always a good idea to go through the process of reviewing the exact amount of cover that you need, especially when you and/or your family goes through lifestyle changes like marriage, children, promotions, retirement and divorce.
Author: Anton v.d. Bijl (Finacial Advisor – Vision Risk and Investment Consultants)
