With life insurance I consistently encounter two problems.
Firstly, younger couples who have inadequate levels of life insurance. And secondly, older people who have no need for life insurance and who are still buying it.
The most important of these issues is the first one. Let’s examine the situation of Bob and Tina, aged 34 and 32 with two small children aged five and two. What might be a realistic level of life insurance for them.
If Bob was to die, he might want the following to happen for his family financially:
• Enough funds to pay for the funeral and to get rid of credit card debt. Let’s say $5,000.
• Enough for an adjustment period of 3 months so that the family can make decisions, pay monthly accounts and organise themselves without the pressure of money worries. Let’s say $20,000.
• Bob would want the house mortgage to be paid off - another $70,000 required.
• Next Bob would want Tina to be able to stay at home with the two girls and provide a secure family environment without being forced to go and find work through financial necessity. At the current age of the children $50,000 for a period of about fifteen years is required. Therefore, an amount of $750,000 is required now (and then invested).
• Bob and Tina feel strongly that their two children should have the opportunity for tertiary education. At say $10,000 each for four years $15,600 would be required now.
• Lastly Bob needs to consider that Tina will not have the opportunity to save for her retirement and he decides that an amount should be put aside in the event of his death which would provide her with $40,000 per year in retirement - $61,000 is required as of now.
This is a grand total of $493,600. This amount will decrease as the years go by, the family gets older and debt levels decrease.
If Tina was to die Bob would need to purchase home help and childcare. An average cost of $25,000 per year for 15 years could be incurred. $214,000 would be required now to make that happen.
For Bob the cost of life insurance of $493,600 is about $48 per month and for Tina at $214,000 it is $18 per month. Reasonably affordable.
We all have different wishes and needs for our families. This article is intended to highlight some of the issues that need to be discussed so that appropriate life insurance is purchased.
