While the concept of Life Insurance is simple – it provides your loved ones with a financial cushion when you’re no longer able to – the different levels of life insurance cover available can make choosing a policy a complex decision.
In fact, for most of us, the technical aspects of Life Insurance are far less difficult to deal with than trying to get a grip on how much coverage we need and why. To help you along the road, Douw Smith, Financial Planner at Attooh!, in collaboration with Sprout Consulting, dispels six myths surrounding Life Insurance and explains the realities.
I'm Single and Don't Have Dependents, so I Don't Need Coverage
Even if you’re single, you should have at least enough Life Insurance to cover expenses like personal debts, medical and funeral bills. If you’re uninsured, you may leave a legacy of unpaid bills for your family or executor to deal with, even though you don’t have any dependents or a spouse.
If you’re single, getting a Life Insurance policy can also be a good way of leaving a legacy to your favourite organisation or charity if you don’t have a high enough income to be able to donate a significant amount while you’re alive.
My Life Insurance Coverage Need Only Be Twice My Annual Salary
One of the most important things to remember when choosing a Life Insurance policy is that the amount you need depends on your specific situation – so there’s no set amount you should buy. If you look at your individual circumstances, there are many factors to consider. For example, you may have medical and funeral bills that your family would have to cover over and above their normal monthly expenses should you die. Then there are other debts such as your mortgage and any other personal loans outstanding. Finally, it’s worth thinking about the time period for which you want to provide for your family after you’ve passed away.
In most cases, a full needs analysis is the best way of determining the true amount of Life Insurance that you should purchase. Unfortunately, the days of computing life coverage based only on your income earning ability are long gone.
My Employee Benefit Coverage at Work Is Sufficient
Maybe, but maybe not. If you’re a single person of modest means, employer-paid or provided term coverage may actually be enough for your needs. But this depends heavily on the type of coverage your workplace provides. A large corporate may provide you with a much more comprehensive Life Insurance policy than a small business, so it’s important to look into this first. But, even if you do have comprehensive benefit coverage from work, it still may not be enough to cover any outstanding debts you may have and to provide for any spouse or dependent when you’re gone. In this case, it’s worth taking out extra coverage on your own steam.
I Absolutely MUST Have Life Insurance at Any Cost
In many cases, this is probably true. After all, most of us have some kind of debt that someone would need to cover should we die – or we have dependents that would need looking after should we no longer be able to do so.
However, if you have sizeable assets and no debt or dependents, you may be better off self-insuring. Especially if you have medical and funeral costs covered, then Life Insurance coverage may be optional. Make sure you do a full needs analysis first of what your assets are worth before you decide that you’re in a position to self-insure your life.
Only Breadwinners Need Life Insurance Coverage
Not true. The value that a deceased non-working spouse adds to a household can be much higher than you think. Although it is true that the non-working spouse probably won’t need as much Life Insurance as the breadwinner, the loss of the homemaker will still have an impact on the household’s financial standing. For example, if the homemaker passed away, childcare may need to be paid for when this expense wasn’t applicable before. Proper Life Insurance coverage for homemakers should therefore be an integral part of your financial planning.
I'm Better Off Investing My Money than Buying Life Insurance of Any Kind
Not true. Until you reach the breakeven point of asset accumulation (the growth of the value of one's financial assets), you need Life Coverage of some sort to make sure your family continues to stay financially stable. Once you’ve saved a few million Rands worth of liquid assets (cash or assets that can be easily converted to cash), you can consider discontinuing – or at least reduce – your Life Insurance policy. But before that point, you take a big chance when you depend solely on your investments in the early years of your life, especially if you have dependents. If you die without coverage, there may be no other means of providing for them after your current assets are depleted.
Ann Wilson from The Wealth Chef offers more insights on two common Life Insurance myths
Life Insurance companies don’t pay the claim amount after death
Many Life Insurance policies come with a Death Benefit - a cash payout that the dependents receive after your death which will assist them in covering everyday expenses. A R1 000 000 Life Insurance policy guarantees the policy-holder a R1 000 000 death benefit. If you pass away while the policy is still active, your beneficiaries will get a R1 000 000 Death Benefit, which is often exempt from tax and always exempt in the case of employer supplied group life schemes.
Life Insurance is too expensive to afford
There are a variety of factors that determine the cost of Life Insurance, such as your health and lifestyle, the type of Life Insurance policy and the insurance company. But remember - you should purchase a policy large enough for your beneficiaries to continue their standard of living from the income/interest earned by your assets, and not just the payout alone.
To calculate how much Life Insurance you need, consider your current net worth (your total assets minus your liabilities), how much your dependants need in total, and what the gap is. For example, say your current net worth is R1 000 000 and you need a capital amount of R5 000 000 to provide for your dependants, then the Life Insurance you require to fill the gap is R 4 000 000.
To find a policy to suit your unique needs, it is recommended that you compare rates with a reputable company.
In the vast majority of cases, it’s always a good idea to have a Life Insurance policy in place to provide the peace of mind your loved ones will be looked after when you’re no longer here. Unfortunately, there are many myths that exist around the Life Insurance concept – which means you may not be leaving a big enough financial cushion once you’re gone. This can have a serious impact on the future wellbeing of your spouse and dependents, so it’s worth separating myth from fact.
Already know how much Life Insurance is right for your specific personal circumstances? Get started by comparing Life Insurance quotes now.