Last week I kicked off the year talking about the five reasons why you need life cover. This week I’m going to touch on one of those particular points. Oh and Ive also included a quick video for you to watch later in the blog post!
Let’s start with this. If you pass away and you have dependents who were financially reliant on you, you’ve got to leave them with enough money to generate an income ( the income they’ve lost because you aren’t around anymore to provide).
“How much money is enough to provide a long-term regular income for my family?”
Well that’s the question we are about to answer in this blog post.
It all depends on the following 4 factors:
1. How Much Income Does Your Family Need On A Month To Month Basis?
Naturally the more income you want to secure for your family, the bigger the amount of invested capital you are going to need. Remember that the life insurance pay-out, your spouse receives, needs to be invested. That investment needs to generate a return, and it’s that return on the investment which will be drawn down by your family as income. The bigger the capital amount invested, the more money can be drawn down as income.
2. How Many Years Does That Income Need To Last For?
Let’s quickly assume you have a two year old daughter. If you pass away you want to insure she has sufficient regular monthly income to last until she turns 21 (finished with varsity studies). That’s a 19 year term. You see in order to accurately work out how much lump sum capital you need to generate an income, working in the term the income needs to last for, is crucial. Again the longer the income needs to last, the bigger the amount of capital required.
3. What Type Of Return Do You Expect On Your Investment?
If you don’t know anything about investments, this is the important bit. Investing is all about risk and return. The more risk you take with your money, the higher the return you might get. The lower the risk, the lower your return. The problem with high risk investments is that you can lose a portion of your capital when markets fluctuate. And that’s not a good thing when you are reliant on having the capital provide a steady income. That’s why you’ve got to factor in a “conservative” return on your investment when doing this particular calculation. We suggest a money market return ( bank investment rate). Currently money market investments are offering around 6% return on your money.
4. What Type Of Annual Increase Do You Need On The Income?
You would agree that a R100 doesn’t buy you what it did last year? And it certainly doesn’t get you nearly as much as it did five years ago. Inflation is what erodes the buying power of our money and in order to counter the effects of inflation you need to build in a suitable annual increase on the income you want to leave your family. I would suggest CPI ( Consumer Price Index) plus at least 2%.
Ok, let’s recap before we see how these 4 factors are used in the income calculation.
1. How much income does your family require on a month-to-month basis?
2. How many years ( the term) does the income need to last for?
3. What type of return can you expect from the invested life insurance proceeds (capital)?
4. What type of annual increase do you need on the income?
Now let’s watch the video and see the 4 factors in action and after that get in contact here if you need any further assistance with your life insurancecalculation.
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