Discovering that you, or someone you depend on, doesn’t have enough insurance can really be a tragedy on top of a tragedy, because you usually only find out when things go wrong.
Ever heard the story about the guy who was paying for insurance for years and years, but when he needed to claim back, what he got paid out wasn’t enough to cover his loss?
Discovering that you, or someone you depend on, doesn’t have enough insurance can really be a tragedy on top of a tragedy, because you usually only find out when things go wrong. Which is why we think it’s important you learn how to work out what the right amount of cover is, way before that happens.
Insurance is meant to pay out the right amount if something happens to your assets (things of value). If your car were in an accident, could you buy a new one? If you became disabled in that accident and couldn’t do your job anymore, could you pay your bills? Finding the sweet spot between too little and too much cover comes down to identifying your assets, risks and needs.
For short-term insurance (insuring your stuff), you’d want enough cover to be able to replace the asset, so you’d need to know what that asset is worth in today’s money. It’s the same with long-term insurance (insuring your life), except you’re not replacing a thing, but the earning potential or security provided by a person. And it’s not necessarily in today’s money, but a prediction of how much cover will be needed years into the future.
When trying to work out how much life cover you need, you’ll want to consider how much you earn, how much you spend, your loans and debts, and whether or not you have people who depend on your income for support.
You’ll also need to consider the impact of time. For example, if in 10 years time you earn the same salary as you do today, your money won’t go nearly as far because things get more expensive over time. This is called inflation and, for life insurance, you should predict how much money will be needed to cover your future expenses.
Another time-related factor is the number of years you’d like to cover your dependants for. Say your dependants are your elderly parents, you’d probably only need enough cover to pay for your funeral costs, outstanding debts, home loan (if they live with you), and to continue providing them with an income up to a certain age (let’s say age 90). But, if those dependants are young children, you’d want to cover the same things, but also include the cost for childcare and their education up to a tertiary level for a different, and possibly longer, period of time (say until they’re 25 and old enough to earn an income).
Now, you could try to work all of this out on your own, hunched over your bank statements and a calculator, but a lot of people would find it very overwhelming and would want some reassurance that they hadn’t missed something important. What most people do is either to meet up with a financial advisor to assess their needs, or to use an online calculator to do it at a time and place that’s more convenient.
It’s important to note that traditional life insurance pays out in one go (called a lump sum payment) when you die, but it’s actually much more accurate to calculate how much cover you need paid out as an income (monthly). Find out more about Sanlam Indie's Death Income Protection.
Whichever route you choose, you’ll need to provide pretty much the same information: your monthly income and expenses, your debts, and whether or not you have dependants. More advanced calculators will give you the option to set your budget in terms of how much you can afford to pay in premiums each month. They’ll suggest not just how much cover you need, but which types of cover too.
When you’ve worked out how much of what types of cover you need, it’d be wise to shop around a little and to ask lots of questions. You don’t want to be convinced into paying for something that sounds too good to be true, but actually amounts to a shortfall when it comes time to claim.
Also, when you’ve taken out a policy, be sure to revisit it every couple of years because, if your situation changes significantly (like you buy a house or have another child), so too should your cover.
Finally, insurance isn’t the only way to prepare for your future. Insurance is awesome at covering you immediately, but it’s also a good idea to start growing your wealth by saving and investing your money so that you can eventually become self-sufficient.
There are insurance companies that embrace the best of both worlds: rewarding clients with an investment that grows while they’re being insured.
So, the bottom line is to know your situation and make sure you get the right amount of cover to match. Happy shopping.
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