Do You Need Life Insurance

In the age of instant gratification and social media, life insurance is often found at the bottom of your shopping list. However taking just a few minutes to assess could prove extremely beneficial in the long-term. Insurance is effective in managing an unpredictable risk event which requires a large capital outflow. A philosopher once said that whatever is sweet in the start turns bitter later and whatever is bitter in the start is nectarine in future. Life insurance certainly falls into the category of bitter in the beginning but hugely beneficial later on.

To some, life insurance has dreary connotations often seen as a grudge purchase sold by overzealous commission-driven brokers. In the fast-paced technology age, how many people would consider buying something that only has value after you die? That almost seems biblical. Ironically, the first life insurance was created by the unselfish act of two clergymen in 1744 to provide pensions for families of deceased clergymen. Based on actuarial tables they determined how much each minister should contribute from his salary in order for his family to receive a reasonable pension upon his death. By 1765, 21 years later, their calculations were correct to £1 becoming the forerunner to life insurer Scottish Widows, now having assets of £150 billion.

The following quick assessment should determine whether you need to move life insurance back to the top of your shopping list. Answering positively to any of the three questions below indicates that life insurance must be seriously considered:

• Do you have dependents who rely on your income to sustain their lifestyle?
• Do you have any uninsured debt?
• Do you have an estate that exceeds R3.5 million (or R7 million if you are married)?

Dependents may require continued financial support to maintain their lifestyle, as in the case of the clergymen’s family, and as a rule of thumb require capital of 300x their monthly requirements. Upon death debt will need to be settled, or repayment terms arranged, and the tax man will certainly be knocking for his share of your estate, currently 20% in excess of R3.5 million (or R7 million per married couple).

The following is an illustrative example to estimate how much cover you may need:

	Item	Calculation	Cover Required
1.	Dependents’ lifestyle needs	R30k/month x 300	R9m
2.	Uninsured Debt e.g. Home loan, student loans		R2m
3.	Dutiable estate of R8.5m	(8.5m-3.5m) x 20%	R1m
	Total		R12m
	Less: Available from estate	8.5m	(R8.5m)
	Shortfall	12m-8.5m	R3.5m

In the above example, there will be a shortfall of R3.5 million thereby placing severe strain on your dependents continuing their customary living standards. Furthermore, there may also be liquidity issues when being forced to sell assets quickly to raise capital. The worst position when selling assets, which should be avoided at all costs, is to be a forced seller. Life insurance is a cost-effective and easily accessible tool that can be used to manage each of the above scenarios. A few hundred rands will provide cover in the hundreds of thousands and you can even purchase cover in the millions, if necessary.

At a younger age life insurance is easily available and once covered no further medical tests are usually ever required to continue your cover. Some insurers even provide cover without any medical tests and others have products which even pay a portion at retirement age and before your death! The key is to first determine whether you have a shortfall in your cover and thereafter select an appropriate product from your trusted financial advisor who will assist with a comprehensive bespoke analysis. As life insurance is also exempt from estate duty, the total proceeds will be received by your beneficiaries. South Africa has deep life insurance markets providing customers with a wide-range of products through long established players like Liberty, Old Mutual, Sanlam and Discovery.

It is certainly worth the few minutes to investigate whether you are appropriately covered instead of leaving bereaving family members to downgrade their lifestyle. No insurance is like not having a parachute when you need it; chances are you will never need it again.