Life insurance, income protection and other insurance

Life Insurance – Putting a value on YOU

You already own your most valuable asset

As mentioned in a previous article on spending less than you earn, your most valuable asset might in fact be you. Not your car, your investment policies or even your house. So while the black-market trade for organs is lucrative, you are worth even more when you consider that it’s you that earns a salary, it’s you that starts a business or a side-hustle and it’s you that can apply yourself towards financial pursuits. That’s what life insurance is all about.

If you consider the sum of your earnings that lie ahead of you, even just the ones you’d expect, you’ll arrive at a tidy sum.

A simple calculation based on a R25,000 per month salary for a 30 year old, will present you with a combined earnings figure of about R34 million.

Uh…how many million was that?

While enticingly large in value, much of this future income is already spoken for. Bond installments, medical bills, groceries, school fees, university fees in the later years and that holiday you don’t yet know you want – a very large amount of this money will be required for your future living expenses as they arise.

Without your ability to earn a salary, these future costs cannot be paid. Granted, the expenses generally arise as the income is earned, i.e. month by month, but what happens when there is no income? What happens if you aren’t around? What happens if you die?

Let us help you with this one.

If you die, you don’t get to earn a salary. You don’t get bonuses and you don’t start that side business.

Do the expenses keep racking up?

Likely yes.

So how do they get paid?

They don’t!

Therein lies the massive warning.

We build our lives based on our ability to keep earning. We borrow money over 5 years to buy a car, now. Buy houses and agree to pay them off over 20 or even 30 years, effectively setting aside a portion of a generation’s future earnings to put a roof over our heads, now.

We have children, with visions of sending them to good schools and then to a tertiary institution.

We start to live our ‘now’, by borrowing from our future selves.

But when your future self doesn’t exist anymore – things get difficult.

Listen to all you need to know about Life Insurance on the Take Charge of Your Money podcast

You go away, but banks don’t

It’s harder for people to think of their ability to get paid every month as an asset worth insuring, even though in our example it could be worth as much as R34 million, than it is to recognise the need to insure one’s car or house.

Your bank and creditors don’t care that you’re not around. They’ll still be requesting their debit order at the end of the month, same with your medical aid premiums. Your insurer doesn’t care.

You’re dead, so you’d probably not care too much either, but the problem now becomes that of your dependents that still need groceries, their school fees paid and a roof over their head.

If you have someone who relies on you for an income stream, whether it’s a parent, a spouse or a child and they would have no or little means to replace that income stream if you died, then you absolutely have to have a serious conversation about life insurance, to the point that if you don’t, you’re being selfish.

But life insurance sounds horrible and I don’t want to even think about it

Life insurance is one of the simplest things around and one of the core components of a great financial plan. A lot of your own future financial plan is based on your ability to earn money and to apply your difference to a sound investment. Without this income stream, everything falls flat.

Your spouse and your dependents’ financial plan is likely your financial plan given your intertwined lives, such that should you die, their entire plan is left wanting without the core ingredient – income. Life insurance makes sure that they still have money to work with and continue on with their financial journey.

If you are formally employed, your employer may even have a group scheme in place that provides you with some life insurance. You pay for this through your monthly cost to company, but it is likely insufficient to replace your lost salary. Most companies offer life cover in the region of 3 or 4 times your annual salary. On the contrary, if you are looking to replace your entire future earnings by way of a present-day lump sum, you may need much, much more.

If you think this article does not apply to you because your employer gives you ‘free’ life insurance, please think again. Find out from your HR department just how much you qualify for.

Is this enough?

Don’t know?

Consult a financial adviser!

How much and when?

The exact amount of life cover you need is likely best left to a financial adviser to calculate. How to choose a financial adviser and when exactly you should choose to seek their advice is worth an entire article on it’s own though.

The reason we advocate involving a financial adviser when figuring out your life insurance needs, is that a good adviser will have the skill and knowledge to evaluate your existing commitments and how a loss of income might affect your dependents. They will be able to calculate what levels of income your dependents might reasonably be able to earn on a lump sum into the future, something we’d guess that you’d not be that great at right now.

Their time spent evaluating your needs will likely cost you nothing should you decide to place your business with them, which makes it easier to engage with someone qualified to get their best advice.

It may not be that you need to insure the total value of your future earnings. A simple arbitrary number, large enough to help settle some debts should you die, might be all that your spouse needs. Guessing your life insurance needs however is not appropriate.

If you are in a couple and you both contribute financially, the loss of one’s spouse will mean you need less life insurance as your spouse will still be able to earn going forward.

If nobody relies on you and you have no dependents, then you likely don’t have to worry about life insurance at all. However, don’t forget about what you’ve read here today as you tackle your finance journey. If you get married or decide to have children one day, you absolutely must re-evaluate your position and consider your life insurance needs.

How much is life insurance going to cost?

Life insurance is not expensive and the peace of mind that it brings is priceless. As with all insurance, your premium is based on your risk profile. Older people will pay more, as will people with ill health. There may even be events that could cause death that would not be covered under your policy. These are all things that your financial adviser can help you with and explain to you.

Most life insurance is flexible in that it can be increased or decreased as your circumstances change. The most important thing is to get a policy in place.

As is the “Finance DIY” way, get quotes from multiple life insurance companies. Most financial advisers will be able to get you comparative quotes and share their experience with working with the various life insurance companies, ultimately guiding you to a good product.

Like any insurance, you pay a regular premium. Should you die, the life insurance company pays your named beneficiaries a lump sum. The amount is tax-free and your dependents can do with it what they want.

Life insurance comes in various forms, ranging in duration from “term” insurance, up to “whole of life” insurance, which pays out when you die, not “if” you die at some stage during an insured term.

Each life insurance company will also have their own bells and whistles that they attach to their insurance contracts. A financial adviser will help you make sense of these.

The good news is that one day you might not need any life insurance.

As you get older and your retirement assets ideally grow, it is fair to presume that you’ll need less and less life insurance. This is because that should you die, your surviving spouse will likely become the owner of any retirement assets you might have with your employer or with any other financial institution. These assets will aid in providing a future income stream for your beneficiaries.

By the time you reach retirement age, you might then have sufficient assets such that you no longer need to work to generate an income stream from employment. It is at this time too then, that insuring yourself for a loss of salaried income is not a necessity, given that your future income from employment sums to almost nothing, because you’re sipping cocktails on a beach in Bermuda at the age of 80. Well done.

And what about income protection?

A subsequent note:

We get that paying for any grudge purchase is tough, so rather than hear us repeatedly try and convince you about the benefits of life cover, income protection  and critical illness cover – take it from arguably the most well-positioned guy in SA to talk about these things. Peter Bond is the Chief Medical Officer for Old Mutual. This means he’s pretty much seen it all, when it comes to the unimaginable and the unfortunate.

Please share your thoughts