Choosing the Right Coverage: Calculating Life Insurance

If you are wondering how to calculate how much life cover you need then this article is a good place to start. Working out how much cover your family would need to survive without your income in the event of your death is not a task to be taken lightly. We review five different approaches, from rule of thumb estimates to more sophisticated tools like life insurance premiums calculators and a Financial Needs Analysis or FNA.

Option 1: Multiply your yearly income by ten.

The simplest way to work out how much life cover you need is to multiply your annual income by ten. That's about it. So, if you earn R100,000 per year, multiply that figure by ten. That is R1 million in cover. Remember this is a very rough estimate! 

Many factors should be considered when calculating your sum assured. These factors include your debts, car loan, home loan, and your children's educational needs. You should also include stay-at-home parents, who may not be paid but contribute significantly to the household. If that parent passes away, the family may have to pay for childcare, housekeeping, and other services.

Option 2: 10 times your annual income plus x for education.

If you have children, speak to your financial adviser about how much cover you would need to take care of their school and tertiary education fees. Then multiply your annual income by 10 and add a lump sum for education.

Option 3: LIFE method.

The LIFE method incorporates more life insurance considerations than simply multiplying your income. LIFE is an abbreviation for:

Loans: Determine the amount owed on debts, including credit cards and loans, as well as your home loan and car finance.

Income: Determine how much money your loved ones will require annually and multiply by the number of years they will require that assistance, for example until your children leave home and start working.

Final expenses and debts: Compile a list of all your final expenses such as funeral costs and executor fees.

Education expenses: Consider your children's future educational needs, including university.

Add up all of your expenses and you should have a good idea of how much life insurance you need. Keep in mind that the LIFE method excludes your savings.

Option 4: Financial Needs Analysis

During a financial needs analysis (FNA), a consultant analyses your current financial situation, your future financial needs and goals, and what you need to do to achieve these goals. An FNA ensures that you are sold appropriate financial products that you can afford and that will help you finance your dreams and ambitions, such as providing for loved ones, or having enough money to fund your retirement.

An FNA provides you with an objective view of your financial situation, allowing you to gain a clear and complete image of your finances. It will help identify any gaps in your financial plan.  After completing an FNA, you can create a personalised, cost-effective financial plan with the help of your financial adviser.