LIFE INSURANCE – CHOOSING THE RIGHT POLICY
The importance of life insurance should not be under estimated and theamount of cover needed should also not be taken lightly. For the main income
earner with a young family, a figure equivalent to ten times annual salary may
actually not be sufficient to maintain the family’s way of life!
Delaying a decision to take out insurance can prove very, very costly. Not only
do premiums rise rapidly with age but, should a serious illness or accident
befall you, the insurance companies may no longer wish to know you. So
having agreed that action is called for where do you start?
What do you need and what can you afford?
Ideally, the exercise should start with a calculation of how much your family
would need to replace your lost income, converted to a lump sum. This would
include a projection of the cost of seeing your children through their planned
education. You can obtain quotes from insurance companies to see what thiswould cost.
If the above exercise produces a figure beyond your means to cover, then you
will need to take a more realistic approach to determine how much you canactually afford to pay. There is no point in paying a premium that could
become a serious burden or which you are unable to maintain, resulting in apolicy lapsing.
Fortunately there are two main types of insurance, one of which is less costly.
Whole of Life
This is a form of insurance where after two or three initial years part of yourpremiums are invested in stocks, bonds and such like. The policy then starts tohave an investment or surrender value. If you maintain the policy over anumber of years, typically as much as 15 or 20, the surrender value could be inexcess of the premiums you have paid. In fact, if your premiums are sufficiently
high and the investment performs well you could build up a sum to the pointwhere it can continue to fund the policy and you do not need to pay furtherpremiums.
There is, however, a factor that is working against you and that is your age.
Even though the premiums remain the same the actual cost of insuring you
rises every year, so that a greater call is placed on the underlying investment. Ifthe latter is not growing fast enough the cost of cover could swallow up theremaining funds to the point of exhaustion. At this point the policy would haveto be terminated or you would have to agree a higher premium. Ideally thisshould not happen and the policy should sustain itself for the ‘whole of life’ as
per its definition.
Level Term AssuranceThis is a far more economic form of cover. Depending on the term selected,
which would typically be from 10 to 20 years, the fixed premium is based on
the average cost of cover over the term. The downside is that the policy has noinvestment or surrender value. It automatically lapses without value at the endof the term. The big plus factor is the lower cost.
Term assurance is also available for just one year. This would be cheaper still inthe early years but would rise sharply with each year of age so it would not bea good idea for the longer term, although it might suit someone who needed
cover for a limited period.
Death is not the only risk
While life insurance is well understood it is easy to overlook the risk of livingbut being unable to work. In certain circumstances it could be even worse if
the breadwinner survives but needs expensive ongoing care.
Medical insurance is the first line of defense. It is vital to be covered yet this in
itself does not cover loss of earnings. Ideally, critical illness insurance should be
bolted on to life cover. This would pay out a sum of money in the event of theinsured suffering one of a list of critical illnesses, including the most common
ones of stroke, heart disease or cancer. Considering that more people actually
suffer a critical illness and survive than actually die before the age of 65, thereshould be a greater awareness of critical illness. Of course cost is an issue anddue to the high probability of a claim that is no surprise.
Striking a balance
At the end of the day, everyone has to determine how much they require tolive a comfortable life and how much can be allocated to protect that way oflife, not forgetting also the importance of saving for the future.
All of which makes financial planning an important and complex task for us all.
Eric Jordan