Are you constantly hearing advertisements for life insurance companies and wondering if it’s something you should consider? As you’ve probably guessed, there is money to be made in insurance and this is why there is such competition in the life insurance market.
Insurance is a product sold on fear. Generally the salespeople have you imagine the worst happening and then have you try and figure out how you would cope financially with the situation. Obviously, the simple solution is for you to buy a life insurance product and then you don’t have to worry about anything other than how to pay the premium.
So, how do you work out how much cover, if any, you need?
Some people go overboard and insure themselves for absolutely everything and they choose a massive round figure, such as one million dollars life cover. Often these people are struggling with day to day life and they feel good about knowing that at least if they die, their family will be well off. This, in my opinion, is silly. Firstly, why do you want to wait until you die for your family to be financially okay, and secondly, if you are struggling, why do you want to saddle yourself with an exorbitant premium payment?
Before you think that I’m totally against life insurance, I’m not. But, I do think that to find the right level of cover, you should write down on paper your current financial situation.
What do you own? These are assets. Write down their approximate values.
What do you owe? These are liabilities. Write down the totals and the associated regular payments.
How much income do you have coming in now? What expenses do you have going out now?
Unlike general insurance (house, contents, car), life insurance can be for any amount that you stipulate. Salespeople love this, because they can sell you more than you need!
If the worst happened, how could you rearrange your finances to cope? If you are part of a couple and either of you could afford to service your home loan on your own income, then you probably don’t need cover. Alternatively, if you own a rental property or other assets that you would be prepared to sell to help pay for your own home in a crisis, then you also probably don’t need cover.
If you have children and one of you (for argument’s sake, we’ll say mum) stays home with them, then you would need enough life insurance to pay off the home loan if one of you were to die. You would both need cover because dad would need to look after the kids if mum were to die and mum would have no income coming in if dad died.
A lot of people these days are stretched covering their home loan repayments even with a double income. In this case, you definitely need to make sure you have enough cover to repay the loan if one of you were to die. At the very least, pay off half of the loan so that the remaining person can manage on their own.
Life insurance is expensive and often seen as unnecessary if you are young and healthy. Ultimately it is a personal choice and if you would be happy to accept a major change in lifestyle rather than taking out the insurance, then that is fine too. As long as you have given it some serious thought so that you are not caught out if the worst happens.
It’s also worth noting, that premiums are lower when you are younger and don’t have any pre-existing conditions. Once you get a bit older and decide that perhaps you should have some cover, you may not even be able to get it if you have developed any medical conditions, or the cost of insuring you could be prohibitive.
As with all of your insurances, you should review your life insurance annually.