How much life cover does my family really need?
There's no magic number, but there is a simple way to work out yours. Here's the method I use with clients.
When I ask clients how much life cover they have, the most common answer is “whatever my employer gives me.” That's a start, but it's rarely enough, and it disappears the day you change jobs.
The right amount is the sum your family would need to keep living the life you've planned for them. Here's how to work it out.
Step 1: Add up what your family would need
- Debts: your mortgage, car loan, SACCO loan or any other balance you'd want cleared.
- Income replacement: what your family spends each year, multiplied by the number of years they'd need support.
- School fees: the remaining fees for each child, through to university if that's the plan.
- Final expenses: funeral and related costs, so nobody has to fundraise in a hurry.
Step 2: Subtract what you already have
Take away existing cover (including group life from your employer), savings you'd want your family to use, and any education plans already in place.
The gap between the two numbers is roughly the cover you need. Then we find a plan that fills it at a premium you can live with.
A rule of thumb, and why it's only a start
You may have heard “ten times your annual income.” It's a useful sanity check, but it ignores your loans, your children's ages and the cover you already have. A family with three young children and a mortgage needs very different cover from a couple whose children have finished school.
Revisit it when life changes
A new baby, a new home, a new business or a new job are all good moments to check your cover again. I review every client's plan at least once a year.
This article is general information, not personal financial advice. Product terms, premiums and benefits are subject to the policy terms and conditions of ICEA LION.