Purchasing any type of insurance policy is often regarded as a grudge purchase, as you can only claim against this policy should a specific event occur. One has to weigh up the likelihood of encountering such an event in deciding whether to insure against it. In most cases, we would look at the financial risk that an event may pose on your wealth or your family’s wealth; subsequently, we would build a wealth protection plan for you to ensure these financial risks that you consider to be of significance are protected against. Although insuring your belongings tends to take priority over insuring your life or ability to work, in this article, we will discuss the latter as these events tend to be far more financially devastating.
I am often asked how much life cover or disability cover should one have? How much is enough? The answer is simply that there is no one size fits all. Due to the uniqueness of each individual’s situation, we must ensure that we run through a wealth protection process to determine what benefits are needed and how much cover is sufficient, depending on your specific needs. We, of course, do not want to be overinsured, but just as critical, we must ensure we are not underinsured.
To answer the question of “how much is enough”, there are some factors that you need to consider through the wealth protection process, and from this, using our financial planning tools, we will be able to ascertain how much cover you should put in place. These factors include:
- Your financial and family situation
- Your financial dependents and for how long they are dependent on you. For example, providing for a six-year-old child in the case of your death is far more onerous than a 16-year-old child
- Your cash flow needs (and how long these need to be met), such as:
- Living expenses
- Medical aid
- Children’s education costs
- Your spouse’s ability to earn an income
- Outstanding debts
- Current asset base
- Where will the proceeds be invested to ensure longevity
Once we clearly understand your financial and family circumstances and what you consider the most critical risks to be covered, we can look at the different types of insurance available.
- Life/death cover
- Lump-sum disability cover
- Dread disease/critical illness cover
- Income protection for temporary and permanent disablement
Once we have decided on the amount of insurance and which types of insurance you will be putting in place, it’s vital to review this on an ongoing basis as your circumstances are continually changing. For example, as you gradually settle debt and your financial dependants get older so, the amount of cover should be adjusted. We tend to find that once debts are settled, and children are in the workplace, the need for these various types of insurance falls away, which is why most retired clients do not have life insurance. Please get in touch with us should you have any questions.