In the past the answer to that question would have been, “Well, how much are you prepared to pay each month? Give me that number and I’ll tell you how much cover you qualify for.” Sounds like an alright deal, if you are buying a TV maybe! Not so great if you are ensuring your family doesn’t loose their home when you aren’t around or that your children remain in their current school and that your loved ones can live the same life that they currently do. You are probably thinking, ” Here it comes… another post meant to guilt me into buying risk cover!” NOT at all. You already know you should have cover in place, and that you aren’t invincible. I am just going to share some insights into determining how much cover is enough and the importance of structuring the cover in ways which ensure the most effective amount of cover at the best possible rates, available at the times you need it most.
First off, to put your mind at ease, when working with a lifestyle financial planner remember you have already paid for the financial plan, so you can rest assured that if there is a shortfall in your risk planning, it is being identified and addressed to meet your needs and not that of the planners. (He has already been paid and does not need to sell you a policy to recoup costs). Risk cover is there to ensure your financial plan continues to work in the event that the cash flow drys up. Simply put, if there is no longer an income coming in then we need to ensure the outflows can still be met. There are a number of ways to address these cash flow needs: You could settle the lump sum or provide sufficient monthly income to meet the monthly cash outflow for the remaining duration OR a combination of the two. This doesn’t even have to be done through risk cover. If you have sufficient liquid assets, you could just use those. Its not just about having R 10 million life cover and thinking, “Well that will be enough.” It’s about matching your need to the level of cover and then importantly, ensuring the cover is priced according to your actual need and not that of the insurer.
Lets assume the following:
- R 1 million outstanding on your bond.
- 10 years left on the term.
- Repayment is R 10 000 per month.
- Your household expenditure is R 30 000 per month excluding the bond repayment.
- R 300 000 outstanding on your car.
- Repayment is R 6000 per month.
- Your child is 7 and his school fees are R 8 000 per month.
How much is enough?
- R 1 million Lump sum cover termed for 10 years.
- R 300 000 Lump sum cover termed for 5 years.
- R 30 000 monthly income or Lump sum of R 5 900 000 whole of life.
- R 8 000 monthly income or Lump sum of R 790 000.
The world of risk cover has come along away in providing answers to clients ever changing and specific risk needs. As a lifestyle financial planner its important for me to ensure my clients specific risk needs are met, and that a one size fits all approach is not offered.
By structuring the cover to match your specific needs I am able to provide the right amount of cover when you need it most and ensure that is priced correctly, giving you peace of mind that you are not wasting money each month on cover which you don’t necessarily need and that you know you will definitely not need in 20 years time. This approach aligns perfectly with that of lifestyle financial planning and should give you peace of mind and perhaps even remove the grudge purchase association we all have with Risk cover.