When you sit down to consider taking out life cover to provide for your family after your death, how much should you get? This is a question that many people are unsure of how to answer. What they end up doing is taking a rough guess when they decide. This is what leads to under-insuring.
It’s hard to conceptualize how much money your family is going to need after your death. A couple of millions might sound like a lot of money, but is it? With a rapidly rising cost of living, how much is going to be enough?
The good news is that there is a way to calculate a realistic figure so that you get enough life cover.
These are the factors to consider when determining how much life cover you need:
Sit down with all your accounts and add up your debt. This includes your bond, car, credit cards, and store cards. Get up to date statements to give you a clear indication of what your total debt is. Take this amount, write it down and set it aside.
Your debt will decrease over time unless you enter into other transactions that leave you owing money to different organizations.
2. Your dependents
There are several factors to consider when it comes to budgeting for the welfare of your dependents.
- How many dependents do you have? The more you have, the more money you must provide.
- How old are they? How many years will it be before they are educated and ready to be self-sufficient?
- In the interim, how much money will be needed each month to support them? If your children are already adults, you don’t need to factor them in. However, if they are young, bear in mind that you’ll be supporting them until a minimum age of 18. Realistically, you’ll be looking after them beyond that age if they further their studies after school.
3. Your income
The amount of money you earn each month is important for two reasons:
- It determines what type of premium you can afford to pay each month.
- It factors into how much life cover you need to replace your income.
Add up all the family expenses you currently cover as this gives an idea of the sum of money needed each month. Bear in mind that the cost of just about everything keeps on going up.
Don’t stick to a conservative figure. Contemplate a figure that is too high rather than too low. Take this figure and subtract from it the monthly debt repayments that will be paid off immediately after your death such as the bond and the car.
Now you are getting to a realistic picture of how much money your family will need to keep afloat after your death. Multiply this monthly figure to create an annual figure. Multiply that by how many years your family will continue to need income replacement after your death.
Think about it in terms of how many years after your death your spouse or children would continue to need an income from your insurance.
The final calculation
Add the debt figure to the amount of money your dependents need and your income replacement. Now you have a ballpark figure to work with. If you look at that figure and compare it with your shot in the dark guestimate, you’ll get a reality check. Don’t be surprised if it’s a minimum of three or four times what you thought it would be.
Now you can start shopping around for life cover that meets your needs. Ask a broker or financial adviser for assistance. They can help you find the perfect life cover product that meets your needs.
A broker or financial adviser can explain all the jargon and technicalities of any policy. Keep up to date with the premiums to assure your family of a financially stable future in the event of your death.