Your financial plan needs to ensure that you are covered for unexpected events that could leave you and your family financially crippled. How do you determine how much cover will be enough should the unthinkable happen?
There is no single answer to the question of how much risk cover you need. It differs from person to person based on your specific financial circumstances and particular needs. A person with no dependants, no debt and significant retirement fund savings would clearly have significantly lower risk-cover needs than someone with a family, significant debt and minimal savings.
Your life cover needs
Your life cover needs can generally be classified as follows:
Protecting your financial dependants: We all want to ensure that our dependants are in the same financial position they were in while we were still alive. The amount of life cover needed to achieve this will depend on the age of your dependants, your outstanding debt and the extent to which you are funding their monthly living costs.
Leaving a legacy: Most people would like to be remembered when they are no longer there. Insurance products have traditionally met this need through ensuring that debts can be paid off or investments can be built up, ensuring your loved ones are in a better position to fend for themselves in the long run.
Your disability needs
When you become disabled you have two financial needs - a need for a cash lump-sum and a need for a monthly income.
A lump-sum disability benefit will generally pay out a cash lump-sum when you are diagnosed as being permanently disabled. This money can be used to settle any outstanding debts, allowing you and your dependants to maintain your lifestyles without having the burden of monthly debt repayments. It can also be used to modify your home if required.
Income protection benefits pay you a monthly amount when you are either temporarily or permanently disabled. This payment is generally used to replace the income that you would have received from your job and hence ensure that your monthly cash flows are unaffected.
The amount of lump-sum disability and income protection cover you need will depend on your current financial situation. The reality is that the majority of South Africans are significantly underinsured when it comes to disability cover.
Even where you have cover through an employer’s group scheme, there may be significant gaps in the amount of cover you have compared to what you (and your family) would need if you became disabled.
Calculating the cover you need
A financial adviser will complete a holistic financial needs analysis to determine the current and future value of your existing assets (including any cover that you already have) and your liabilities (including any amounts needed to protect your financial dependants or that you would like to leave to your dependants).
The calculation of the value of your assets will exclude assets such as the family home, which you may not want your dependants to sell after your death or disability. Similarly, your liabilities would include items such as estate duty and capital gains tax payable.
Risk cover is then used to fill the gap between the value of your liabilities and the value of your net assets, with products tailored to address your specific needs.
The bare minimum
During difficult economic times, risk cover tends to be the first budget cut people make. It is difficult to maintain a payment for an uncertain future event when faced with budget pressures brought on by increasing school fees, interest rate hikes and a general increase in the cost of living.
However, it is critical that you at least maintain enough cover to pay off your debts if something happens to you. Leaving your family with debts they cannot settle will put them in severe financial difficulty with dire consequences. Risk cover can give you peace of mind for a lot less than you realise.
For a detailed financial needs analysis and expert advice on your specific risk cover needs, speak to your Liberty financial adviser today.