Updated · General information, not advice · TitanDC
Start with what has to be paid immediately
Some obligations fall due almost at once, and if there is no cover for them, assets get sold at whatever price is available at the time.
- The bond on the family home
- Vehicle finance, credit cards and personal loans
- Funeral costs
- Estate duty, where the estate is large enough to attract it
- Executor’s fees and the costs of winding up the estate
- Capital gains tax triggered by the deemed disposal at death
Then the income your dependants will need
This is the part rules of thumb get wrong. What matters is how much income is needed, and for how many years — a spouse with young children needs support for far longer than one whose children have left home.
- Decide the monthly amount the household genuinely needs, not current gross salary
- Decide the number of years it is needed for — until the youngest is independent, or for life
- Account for the fact that a lump sum invested produces income and can be drawn down
- Add education costs, which are lumpy and predictable
- Subtract income that will continue: a spouse’s earnings, a pension, existing policies
A worked example
Round, invented figures, chosen to show the method rather than to suggest a target. Amounts are in today’s money and assume the lump sum earns nothing above inflation after fees and tax, so the income capital is simple arithmetic. A household with a bond, two young children and one main earner:
- Bond outstanding: R1 500 000
- Other debt: R300 000
- Education, both children to the end of school: R1 200 000
- Income replacement — R30 000 a month × 12 months × 15 years: R5 400 000
- Estate costs, funeral and executor’s fees: R250 000
- Total need: R8 650 000
- Less existing cover, including group life through an employer: R2 000 000
- Illustrative shortfall: R6 650 000
- A personal calculation would also allow for investment returns, tax and continuing household income, and would not count debt or education twice if they are already in the monthly figure
The benefits that sit alongside it
Life cover pays on death. Several of the events that damage a household financially do not involve dying, and they are covered by different benefits — which is why a plan is rarely a single policy.
- Disability cover: a lump sum if you meet the policy’s definition of disability
- Income protection: a monthly income while you cannot earn
- Critical illness: a lump sum when a condition meets the policy’s definition and severity level
- Funeral cover: a small, fast payment for immediate costs
- Group life through an employer: valuable, but it usually ends when the job does
Review it regularly, and whenever life changes
Review your cover at least once a year, and straight away after the events that change the number materially.
- A new bond, or paying one off
- A child, or a child becoming independent
- Marriage, divorce, or a change in who depends on you
- A significant change in income, or starting a business
- Changing jobs, which usually changes or ends group cover
- Buying into a business with a buy-and-sell agreement
Common questions
Is ten times my salary enough life cover?+
It is a starting point, not an answer. It ignores what you owe, how many years your dependants need support, and what cover you already have. Two people on the same salary can need very different amounts.
Does life cover pay out to my estate or my beneficiary?+
It depends on the nomination. A policy with a nominated beneficiary generally pays that person directly, outside the estate, which is usually faster and avoids executor’s fees on that amount. Without a nomination it falls into the estate.
Does group life cover through work count?+
Yes, while you are employed there. Include it in what you already have — but remember it usually ends when the employment does, which is exactly when people are least able to replace it.
Should the cover be enough to settle the bond?+
Many households make this the first priority, because the bond is usually the largest debt that survives you and many families want to keep the home. Some bond protection policies cover it specifically, reducing as the bond does. Whether it is right for you depends on your circumstances.
Is life cover taxed?+
Proceeds paid to a nominated beneficiary are generally not subject to income tax, though the policy may form part of the dutiable estate depending on the structure. Estate duty and the treatment of specific policies are worth checking with your adviser against your circumstances.
Sources
This page cites the legislation and regulators it relies on, so you can check it.
General information about life cover in South Africa, not advice. The right amount and structure depend on your circumstances, your existing cover and your estate. Figures used are illustrative only. TitanDC is an authorised financial services provider, FSP 8972.