LOUISE FAIRSAVE: Choosing life insurance
FIRST, I THANK all the insurance agents who called to point out the exaggerated premiums quoted for insurance coverage in the last article.
I conceded that the premiums quoted were for an older person; they were provided to demonstrate an important consideration in choosing between term and cash value accumulating insurance policies.
Here are specific annual premiums quoted for a 24-year-old person – whole life policy $866 and a term policy $632. So, at that age of acquiring the policy, there is not that vast difference in cost. At 44 years old, it would be more like – whole life $1 667 and term $794.
Then, too, during the period when insurance premiums were tax deductible, that benefit expanded the investment return of a cash value accumulating insurance policy. Therefore cash value accumulating policies do have their merits.
The key point, though, is that each person needs to consider their circumstances and their expected return and make the decision that best suits them, understanding the differences in how the particular policy operates.
Your insurance agent will provide a range of options and discuss their merits, yet the onus is on you to make the choice of policy and to review the progress of your policy and any new insurance coverage needed at least every five years.
Here are some other guidelines and considerations in choosing life insurance coverage. First, you need insurance coverage in order to provide adequate ongoing income for your dependent should you die prematurely. For example, dependents would be your spouse, children and others who may be incapacitated or who may expect you to provide for them in some way.
So you need insurance preferably while you are young, at the start of your career, if you have such dependents or expect to have them in due course. Reviewing your need for insurance periodically will depend on if you get married later in life or if you wed a spouse who is much younger, as you have children or new dependents later in life.
Generally, once you have been planning your finances along the way, you will not need insurance coverage on retirement – at the end of a successful career. By then, your accumulated assets plus your pension and National Insurance benefits should suffice to adequately maintain your lifestyle. At this later stage in life, you may consider insurance in order to ensure that you can cover your final expenses which would provide for your funeral costs as well as to cover any estate distribution costs.
A general rule of thumb is that your policy should provide coverage for, say, ten times your annual gross income. At the very start of your career, it may be useful to gross this up to say 15 times your starting salary. Another way of considering the amount of coverage needed is to assess the annual median family expenses and provide coverage for ten to 15 times that amount.
However, this depends also on how much you can afford to spend in purchasing the policy. If the allocation in your budget allows for a cash value accumulating policy for the proposed amount of coverage, you can work the numbers and decide whether to proceed.
However, it is typically found that a term insurance policy will more easily fit within your budget for the level of insurance coverage recommended. Here is where it is proposed that you purchase the level of term coverage that is as close to this rule as is comfortable for your budget rather than reducing the coverage in order to afford a cash value accumulating policy.
Insurance is a powerful estate planning tool and therefore a critical part of your personal financial plan. It is important that you take the time to make good choices and review them periodically with your insurance agent.
*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.