How Much is enough
The first in the "How much series" I have often been asked the question " How much is enough" in reference to the amount of life cover that is needed. I normally answer in this way. If the cover is for the protection of your loved ones and those for which you are responsible either legally or emotionally, then the cover amount should at the very least, be sufficient to replace your income. That is to say the capital sum that your beneficiaries receive, should, be invested with the investment return being equivalent to the gross income you were earning at the time of death. This is a minimum starting point. I use a clever bit of software to work out salary increases and inflation over the given time period to calculate what will be needed (certain assumptions have to be made) If the premiums will allow I will cover the additional required amount. Here is an example of some calculations based on South African market conditions. Simplified calculation, Current salary before death R 30 000 per month.The min cover required to produce this income is R 6m at an assumed return of 6% pa on Capital.IE 6 million x 6%= R 360 000 per year or R 30 000 per month. The skill however is to produce above 6% consistently to be able to add back to capital, or alternatively the Life Cover sum needs to be increased. ( Premium budget permitting) At 6 % growth and a 5% salary increase per year this capital will only last about 19 years. ( Inflation assumption is at 6%) I take all forms of cover, cash and investments as part of the overall sum including group life benefits, (I exclude the primary residence) that the client may have into account and then provide for any shortfall. The planning at this stage is very important and you need to know as much as possible about your client, the family and their needs dreams and desires, Remember this exercise is to answer the question " How much is enough" This will trigger the next discussion, the disability and loss of income planning need. It is very important to impress on the family that the Capital sum that the Life Cover payout provides, is primarily designed as the income producing machine, that has been lost in the death of the Life Assured. In my next post I will visit Disability, temporary loss of income and Business cover if the Life assured is a business with Partners. Kind regards Neill
Recent Comments
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My husband and I have this covered, thanks for the reassurance! - Joy
That's good Joy, I am only licensed to write cover in South Africa but the principle is the same anywhere in the world.
Thanks for the message.