Calculate how much life insurance you need

Life insurance helps ensure that your loved ones are financially supported after you’re gone. To give them the best protection, it's important to figure out how much of it you need. Just like your favorite suit, life insurance needs to be tailored to your exact fit.

Everybody would love to leave a fortune for their family. After all, when you’re gone, there’s going to be a giant you-sized hole in their lives. With millions, at least your family won’t have to worry about money to support themselves. Choosing a life insurance coverage amount should be a no-brainer right? The higher, the better?

Unfortunately, this isn’t realistic for most of us. The larger your policy, the more expensive your premiums become. Over-insurance means you're paying more in premiums than necessary. This could create financial strain, diverting money from other essentials like retirement savings, investing, and debt reduction. If you can’t afford to pay for your policy and you must cancel it, it doesn’t help your family at all.

On the other hand, you want to avoid buying too little coverage. In that case, your dependents could experience severe financial hardship. Research shows that many South Africans are underinsured.

It’s quite a conundrum. How much life insurance coverage should you get?

It can be frustrating to continuously hear things like “it depends” when asking questions about insurance. While this is true, sometimes you just want some general guidance in the right direction as a starting point. While simple calculations do not take the place of personalized financial advice, they can help point you in the right direction.

Tip: Work out how much coverage you need and consider investing the rest. If you do find that you need more insurance than you can afford, perhaps start by taking out cover you can afford rather than nothing or a policy you’ll struggle to pay for.

What is Life Insurance

The insurance industry can seem like a mystery with more questions and premium payments than answers. The good news is that insurance isn’t really all that complicated - or, at least, it doesn’t have to be.

At its simplest, insurance is a safety net. You purchase a life insurance policy to protect what, and importantly who, you love and value in the event of your untimely passing. That can range from the people who depend on you financially (or people you provide important services to that they would otherwise have to pay for), like a spouse, partner, kids, parents, siblings, or other loved ones.

Main uses of life insurance:

• Funeral/ final expenses
• Income replacement/ support
• Pay off debt
• Cover costs/ claims in one’s estate
• Transferring wealth e.g. to cover taxes
• Creating wealth/ inheritance

In a nutshell, if anything happens to you, insurance can help ease the financial burden on those left behind. Without adequate life insurance coverage, your family may face significant financial hardships during an already difficult time.

Calculating how much life insurance you need

There are several simple methods to determine how much life insurance you really need.

Rule of thumb 1: The income multiple method

This is one of the easiest and most popular methods. Simply multiply your current annual salary by a number between 5 – 15 to calculate your suggested amount of life insurance coverage. Ten is the most recommended multiplier in my experience but a lower or higher multiple could be more appropriate based on your age and budget. This method is ideal for people close to retirement age.

Say that you earn R180,000 a year. Using the “multiply by 10” method, you would need R1,800,000 of life insurance coverage.

A great variation to this method is to add the following to the value calculated:

• any uninsured debts,
• uninsured funeral costs and
• an amount to cover university costs per child (We would suggest something around R350,000 for a 3-year degree per child).

Rule of thumb 2:  The LIFE method

The LIFE method takes in more considerations than simply multiplying your income. LIFE is an abbreviation for:

Loans: Determine the amount owed on debts, including credit cards, personal 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.

Final expenses: 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 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. So you can tailor by lowering the calculated amount by:

• Any savings and investments you have including retirement savings and
• Any existing life insurance you may have e.g. work life policies, credit life, and funeral policies.

TIP: Talk to whoever you wish to manage the proceeds from your policy about buying an annuity with the part of the lump sum meant to replace your income. An annuity will pay your loved ones a monthly benefit over time rather than all at once. The unpaid benefit will earn interest until it’s fully paid out.

Needs calculator method

Perhaps nothing is easier than a life insurance calculator, which is why we built a Life Insurance Needs Calculator. Simply download the spreadsheet and answer a few questions to get an idea of how much life insurance to buy. Please play around with the inputs! Full declaration – this calculator is very much a work in progress and by no means perfect.

Tip: Life insurance gets more expensive as you get older. Additionally, you may develop health conditions later in life which can also significantly affect the cost or even eligibility for life insurance. Get your policy early on to “lock in” your coverage and cost.

Figuring out how much life insurance you need doesn't have to be overwhelming. We hope by following the methods outlined here, you can gain some clarity and make informed decisions about your life insurance needs.

Just remember it’s as much about living a better life today as it is about what you’ll leave behind tomorrow. As an investor, you’re on a wealth creation journey which is why EasyProtect is designed to make sure you only pay for the coverage you need leaving more for you to invest. We believe people would rather die leaving more assets they built during their lifetime, which is why our insurance is tied to your assets, the more your assets grow the less insurance you need.

Disclaimer: This life insurance calculator is provided to you by EasyEquities as a guide only, should not be construed as financial advice and has no legal effect on any of your financial products. You use this online calculator at your own discretion. The calculator includes the following assumptions: Annual cost per child is R90 000 per annum. The cost of a 3 year degree is R350 000. Please note that this calculator only provides estimates based on your inputs and the assumption used. Factors such as interest rates may vary. The criteria, factors and/or formulae used by this online calculator are subject to change at any point. EasyEquities, its management, its employees, representatives, agents and affiliates, give no warranty, express or implied, as to the accuracy, reliability and completeness of any information, formulae or calculations provided through the use of this calculator and does not accept any liability for loss or damage of whatsoever nature, which may be attributable to the reliance on and use of this calculator. You should always seek appropriate financial advice before buying or selling financial products.

EasyProtect Life is a life insurance product underwritten and administered by Sanlam Life Insurance Limited, a licensed life insurer, and is offered exclusively on the EasyEquities platform for distribution by EasyEquities. EasyEquities is an authorised FSP, registered credit provider and licensed ODP.