Who Needs Life Insurance and Why

If you had to ask your neighbourhood insurance broker: “Who needs Life Insurance?” the response is likely to be “Everybody.” This is perhaps too generalised an answer to be completely accurate, because there are people who can get by without having any life insurance at all. But, these people are in a minority. The rest of us – the majority -, can’t, mostly because (and this sounds a bit macabre) death comes with a price tag.

When you are faced with determining whether you are one of those people who needs to purchase life insurance, you will probably find that a lot of emphasis is placed on the role you fulfil in your family i.e. spouse, life partner, parent, homemaker, etc. Although we agree that this element is important, it is not the only deciding factor at all.

Here are some factors you may want to mull over if you are unsure whether life insurance is necessary for you or not.

Your Estate’s Liquidity after your Death

Liquidity in this context refers to the cash available to your dependents to meet the liabilities of your estate after your death. Depending on your circumstances, settling your estate could take anything from a couple of months, to a couple of years to conclude. The typical expenses your dependents will need to foot during this time are:

  • Capital Gains Tax (CGT)
  • Income Tax
  • Estate Duty
  • Funeral Costs
  • Executor Fees
  • Master of the High Court Fees
  • Newspaper adverts
  • Bank charges
  • Asset Valuation fees
  • Mortgage cancellation fees
  • Property transfer fees

Unless your dependents have sufficient cash, they may be forced to sell your assets on an auction. This could negatively impact the value realised on the assets you bequeathed to them.

If you find that your estate will lack liquidity after your death, life insurance is probably the best solution to this problem. The reason for this is that the insurance benefit will not form a part of the estate, and will be paid directly to the beneficiaries you nominated on your policy. This payout will be exempt from estate duties and CGT.

‘Uninsured’ Debts Payable after Death

If you secured a mortgage on your property, or obtained financing for a motor vehicle, chances are excellent that you will have been compelled by the lender to cede or purchase life cover to the value of the debt you incurred. The advantage of this type of insurance is that these debts are settled in full by the insurer upon your death, leaving your property and motor vehicles financially unencumbered.

Unfortunately mortgages and vehicle finance are not the only debts most people have. Your other debt, such as credit cards, store cards, personal loans, overdrafts and lines of credit will also require settlement after your death. You need to calculate whether your dependents will have the ability to repay your loans without having to get into debt themselves. If they can’t, you should ensure that you have – at the very least – sufficient life cover to settle the outstanding balances on your accounts.

Financial survival of partner and dependents

This is perhaps the most obvious needs area among those that we have discussed already. From the outset, we would like to point out that most homes need two incomes nowadays to survive financially. This makes most couples financially co-dependent. If one income is lost as the result of death, the impact is usually softened in that certain large debts are covered i.e. mortgage repayments and vehicle financing. There may however still be a gap – one that can only be assessed by proper financial planning.

However, it is not only your life partner / husband / wife that you may need to consider. Often there are other dependents too, such as:

  • Minor Children;
  • Special Needs relatives; and
  • Aging parents or grandparents.

If your spouse or life partner or heir is not in a financial position to continue caring for your dependents financially, you will need life insurance to help fill the gap. As a further safeguard, trusts are often established to ensure that these dependents have the benefit of a regular income until a predefined event (such as the death of a dependent), triggers termination.

To conclude

To make things easier for those you leave behind, ensure that your Will clearly details how your estate is to be divided and managed after your death. Also remember that life is a moving ball game, and that updating your estate plan every couple of years will be necessary to ensure that it remains relevant to the changing circumstances in your life.