Life Insurance is for the living

The one financial product nobody likes talking about it is “life insurance”.  The only important statistic is that 100% of us will die, and nobody wants to think about that.  Even though everybody eventually dies it doesn’t mean that everyone needs life insurance.

Some people don’t need life insurance, but others do.  How do you know if it’s you?

Life insurance is unnecessary if you have no dependants and no liabilities that your existing estate can’t meet.  If there is nobody financially dependent on you then there is no real financial loss to anybody else.  There are 2 possible exceptions to this generalisation however. 

Sometimes a lender wants insurance as extra lending security, and so a new homeowner might have to take out life cover to get the loan.  Also, some people might have family medical history that makes it harder to get insurance later in life, so it may be worthwhile getting life insurance while young and healthy, before they actually have dependants.

Life insurance must be considered though when someone else is dependent on your financial contribution.  In plain English: if you weren’t around anymore, but your earnings are still needed, then you should have life insurance.   There is just no other product that will deliver enough money to your family when you are gone.

So if you know you need some cover the key question is simply “how much?”

There are several ways of working out what is an appropriate amount and they all have some merit, but can provide a wide range of possibilities.  The best starting point though is a DIY “needs analysis”, and you don’t need special training to get started. 

Just pretend you aren’t here any more, then have your partner work out what they need coming into the household starting next week.  Establish the living expenses required, less what your partner will reliably be able to bring in (remembering that you aren’t here to help).  Then decide how long you will need that regular amount coming in for (a limited time, until retirement, or?)

Next you think about what last expenses are required (lawyers and estate settlement, funeral expenses, etc.)?  What loans or liabilities need to be removed?  Is there a need for an emergency fund to see the rest of the family through for a period?  If so, how much?  Is other capital needed for other purposes, such as children’s education, or your partner’s retirement fund? 

The process is really that easy - “spend the money”.  It isn’t morbid either – it is quite analytical and very practical.  It is also an excellent way of making sure you talk about your estate planning, and know what each other wants when the time comes.

Your partner does the same exercise next, and it may be that you both come up with different amounts of cover required.  That is fine, and just because less insurance is required for one person in a partnership it does not diminish their value or mean they are worth less in the family.  This is just about working out the financial help needed from an insurance policy.  You should be working out what you need and only pay for that, not what is politically correct. 

At this point you will have come up with what probably seems to be a couple of large numbers.  Don’t let that put you off – life insurance has never been cheaper than it is today, and it is very affordable.

Life insurance really is for the living – the survivors.  Make sure there is enough available for them to survive financially, so that the only thing they are missing is you.