How do you know if you have enough life insurance?
Written by Adon Beddoes on May 16, 2018.
I’ve been carrying out lots of client review meetings recently – something which all advisers should do by the way so if yours doesn’t, it might be time to switch – and the issue of life insurance has been coming up a lot. These reviews have often alerted me to clients with too little life insurance and, believe it or not, others who have too much.
Obviously we have revised their financial plans accordingly to make sure that they have just the right amount but as it’s such a common issue, I thought I’d put together a blog post with some helpful tips on the subject.
The first, very important, question for newly arrived expats is whether the cover you had back home is still valid. It’s a common mistake to assume that it is but that frequently isn’t the case so always, always check.
Next you need to work out how much life insurance is enough. These are the figures that I take into account when working out my clients’ requirements:
• Mortgage – the total amount you have left to pay off.
• Debt and final expenses - Tot up any debts that you have, other than your mortgage, and add an estimate for your funeral expenses (not pleasant to think about but essential if you don’t want to leave your family stressed out about paying for your send off while dealing with their grief).
• Income - Work out the number of years remaining that your family would need financially supporting, often the number of years to go until your youngest child graduates from high school, then multiply your annual income by that number to compute your income replacement needs. Don’t forget your spouse may still need an income to pay into a pension scheme. It’s worth discussing figures with them to get a second opinion on your estimates in case you have missed something.
• Education – estimate the cost of sending your kids to college. This table might help (brace yourself before clicking!). If you are already saving into an education fee plan, not only do you deserve a pat on the back for great financial planning but the amount that you have accumulated can be deducted when working out life insurance needs.
• Current savings – any savings you have which are not earmarked for anything else can be taken into account to keep costs down and make sure that you aren’t overinsured.
• Current life insurance – from any private existing policies you have or any coverage you get through work.
Life insurance is not something that you should plan in isolation but must be integral to your global financial plan taking into account the specifics of your particular financial situation. For example, for some people it might make sense to take multiple, smaller policies rather than one big one. For example one policy to cover your spouse until retirement and a second, shorter one to cover the children until that distant day when they become self sufficient!
A long term approach is essential to get the best value for money as the younger you are the lower the rates will be. Don’t be tempted to scrimp now and risk needing to take out additional expensive coverage down the line if you underestimate your needs. That said, if your budget is limited now, some life insurance is better than none and it can always be topped up in the future when your finances are healthier.
If you’d like to talk about your requirements, as I always say, ping me an email at firstname.lastname@example.org and we can jump on Skype to review what you have in place and ensure that you’ve got everything covered.