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. We have many more Life Insurance Help Articles Now Available.
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. We have many more Life Insurance Help Articles Now Available.