Why is it that so many people get their life insurances wrong? They
are either over-insured or under-insured and neither is desirable. So
how much cover do you need?
We all like to think that we are
invincible, but in truth we are not. Accidents happen and as we age our
chances of becoming seriously disabled also increase.Unwilling to face
the thought of death many people end up never buying cover at all. Then
there are others who feel guilty about the thought of leaving their
loved ones without anything, and buy too much.
The key principles
involved are to cover yourself only for the risks that you cannot afford
to carry yourself -- these are high severity, low probability risks
which are well suited to insurance. And that's where life insurance
comes in.
If you die young, the death benefit to your family
should be large enough to ensure there is no financial hardship. Life
insurance is designed to create as much certainty as possible.
When evaluating the anticipated loss in the case of early death there are two common ways to assess the need for insurance:
- The
'human value concept' which is based on the income-earning ability of
the individual. The life figure is measured by the amount that,
invested at a conservative rate of interest, would yield an income per
annum of half of the retirement figure for 25 years. This method is
more suited to one individual being the main income earner.
- The 'needs analysis' approach is more suited to couples that both
have the same capacity to earn. It looks at the immediate needs and
expenses to be met on death.Firstly you will need to consider immediate
costs such as funeral and legal costs. Then there's the repayment of
debt - do you have a home loan or credit card debt? Finally you may want
to leave some money to help educate children until a certain age (sum x
years) or are there other expenses you consider important, perhaps your
daughter's wedding or costs for a special needs child. Does your spouse
earn good money or are they dependent on your income? The answer to
this question will indicate whether you will need to add a sum to your
life cover to replace income.
Investing and insurance
are both about risk. Well, think about it -- investing for retirement
is the opposite of the risk of dying early as it is the risk that you
will outlive your savings. But keep them separate, life insurance is
cheaper and less complex that way.
Speak to a specialist insurance adviser to assess whether you are over-insured or under-insured and get it right.