Calculating the exact amount of life insurance that you require is not simple. Therefore, we developed a tool.
Financial advisers generally guess your life cover on the premium that they assume you can afford. The answer is not based on science and logic, in terms of what you need. We do not blame them for doing this, after all it is the easy way out to make a sale.
To be fair to the average financial adviser, this question is not properly covered in financial planning textbooks. Insurance companies too simply push for sales and the average adviser must oblige thereby not taking time to understand how to quantify the value bread winners bring to their financial dependents.
The FAIS Act makes the completion of a financial needs analysis (FNA) by financial advisers in South Africa compulsory, but the Act itself is not prescriptive on how an FNA should be conducted. The outcome? FNAs are dovetailed by insurance companies to make the sale rather than establishing an actual need by a client, and quantifying what the value of that need is.
At Virtual Adviser, we pride ourselves in producing quality financial advice supported by technology. Our founder, Jitesh Jairam, developed a mechanism to quantify the value of life insurance that an individual needs. He then coded the calculation into a blog. This excludes Keyman and Business Assurance types of life policies that have established and trusted valuation mechanisms. His focus was on individual life insurance valuation, which for some inexplicable reason remains unexplored by leading financial planning experts, worldwide.
He presents two methods in his blog but supports one method more than the other, based on rigor. We believe that this is the first time that an objective mechanism for valuating life insurance has been postulated, at least in the African context. We invite you to read the blog and participate in the valuation process. You are welcome to share your thoughts on this subject matter as well. The blog can be found here.
Life actuaries concentrate on premium quantification based on an individual’s risk factors for a specified life insured amount. They however do not delve into the quantification of the life insurance amount needed. This we believe remains in the ambit of Certified Financial Planners, who are well positioned to make that call. However, these individuals are trained to be tax, investment and estate planning specialists and do not necessarily have the wherewithal to quantify risk in the area of personal life insurance. Hence, the blog by Jitesh will be of value not just to a person seeking life insurance, but to seasoned and budding Certified Financial Planning professionals as well.
Here are some spoilers, extracted from the blog:
- Life insurance required is dynamic. This means that the amount changes over time as you move through different stages in life namely single, married, divorced, had a baby, kids going to university, health issues, promotions, inheritance, retirement, etc.
- Jitesh Jairam’s life insurance valuating mechanisms are analogous to the calculations employed when valuating a stock (paying dividends) or a company (generating profit), with a few subtle yet important nuances.
- Professional Planners should not sell you life insurance, but they should unlock the opportunities and cash available to mitigate the financial risks that you and your loved ones are exposed to, to the best extent possible.