Financial Fitness Plan – Life Insurance
They say there are two certainties in life; Death and taxes, although the latter seems to be holding in abeyance in this market for the time being. So here in the Emirates we are lucky enough to only have to deal with one certainty, that being the former; death. The fact that we will all die one day is no surprise. We have no real control over when we die but we can take charge of some of the circumstances in which we leave our dependents should we die too soon.
There is no denying that this is a bit of a grim subject, but the consequences of not planning could be even worse. And as part of your financial fitness, this is arguably the most important part of the exercise.
By way of an example let us assume a husband and wife with two children, and the issues that they may face. Why do you need life cover? There are probably a whole host of reasons, but the main one will be to replace you financially in the event of your death. That may sound harsh, but that is what life cover is for. It is to replace your income that you would have earned if you were alive to support your family.
Therefore to begin to calculate the actual amount of cover that you require by establishing your income now and how much of that your family would need to continue to enjoy the lifestyle that they currently have. Once you have this figure for one year, it needs to be multiplied by the amount of years the cover is required. This may be until you retire or until your children are financially independent. Again this will depend on your individual circumstances.
With this figure now established, you can deduct assets that you may have already accumulated and life policies that are already in force, assuming that these are competitively priced, and cover the desired period of time to reach the final figure.
The next question is to review the type of life cover to implement. There are two main types the first is term assurance, and the second is whole of life. Term assurance will provide life cover for a fixed period of time and will no accumulate a fund value.
Whole of Life assurance as the name suggests can offer cover for the whole of your life without a fixed completion date, other than when death actually occurs. This type of cover can build up a fund value which can be returned to you as and when you decide cover is no longer required. This type of cover is generally more expensive for the same level of cover, because it has no end date, and there is the investment content as well.
Generally I would suggest that term assurance is the better option as the cost of the cover is usually significantly lower, and is designed for one purpose only – life cover.
In addition to considering life cover, I would always recommend reviewing the rest of your protection requirements such as critical illness cover and income protection. Indeed it could be argued that ‘financial death’ is more painful than actual death as you would still be alive but unable to work and look after your family.
Financial planning is an art not a science and be considered on an individual and bespoke basis to get the best value for you. If you have any questions or queries please do not hesitate to contact me for further information or advice. Next time I will look at emergency funds and cash reserves. If you have any queries please do not hesitate to contact me at firstname.lastname@example.org or on 0508543983.