LOUISE FAIRSAVE: Necessary insurance (I)
Is insurance really necessary? I am sure there are some people who would have been better off without the expense of insurance; they would have lived their entire life and never had any major emergency or critical financial setback. Thus, looking back, the funds they would have invested in insurance coverage could have possibly been invested elsewise over the long term in order to increase the funds available or their legacy.
Who these lucky persons are would only be known for sure on looking back. Looking forward, no one can predict for certain what may befall them. Insurance therefore effectively provides for a pooling of premiums paid by the policyholders from which benefits will be paid to those policyholders who experience a covered emergency, events or state.
Ultimately though, insurance is a take it or leave it proposition. So, there are many persons who take the risk of not purchasing certain types of insurance – often called self-insurance; they decide to bet that they will not have a related event or state that would be covered by the insurance. Even if such an event or state happens, they will meet the related costs, again betting that overall, they will still be ahead financially than if they had had the insurance coverage.
For those of us who are more conservative in wishing to protect our financial future, this article presents the kind of life insurance coverage considered essential.
Term life insurance typically bought at the start of your working career for about five to ten times your expected annual gross salary at about 40 years old. Term insurance coverage is the cheaper form of life coverage and typically will cost much less when bought around 20 years old. However, the amount of the coverage should be aimed to provide protection of your earning ability right through your career. So, the amount of the coverage bought will depend on your projection of the growth in your earnings over the years ahead.
Term insurance is recommended rather than coverage that provides a savings aspect generating a cash surrender value. Once term insurance is in place, any additional funds saved would best be invested in vehicles which provide a relatively higher yield even if well within the investor risk tolerance.
Additionally, it is recommended that rather than purchase insurance coverage for children, the same funds should be similarly invested. Alternately, an endowment insurance policy with a maturity date that coincides with the need for funds for the child’s education and development may be considered.
Be guided that life insurance is best effected in order to protect the relatives/beneficiaries of the insured person from the loss of earning potential/capacity of the life covered. Would you insure your old, impoverished uncle who moves in with you needing to be clothed and fed and using all your facilities for free? Similarly, why would you insure a child? Maybe to recover the cost incurred in supporting them?
Meanwhile, do include the cost of a disability waiver and of accidental death and dismemberment (AD&D) riders on the policy. The disability waiver allows for the policy to continue in force during periods of disability of the insured person without the payment of premiums. The AD&D rider provides special benefits if the insured person should die by accident and special benefits should the insured person suffer the loss of major limbs.
Fourthcoming articles will look at other types of insurance coverage considered necessary: loss of earnings insurance; health insurance, including major medical coverage; home insurance and retirement plans.
Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.