Discussing life insurance requirements may not be a comfortable conversation, but it’s essential if you want to look after people who depend on you.
By independent financial planner Tim Mackay.
Few people truly feel comfortable discussing life insurance. It addresses a fundamental issue: “How will my family manage financially when I die, or if I become incapacitated?” With our clients, we start this conversation by asking: “If you and your partner died in a car crash yesterday, what would be happening to your family today?” I
nitially, most clients find it confronting to discuss their own mortality. However, as we devise planned contingent solutions, this shifts to a sense of control and, ultimately, peace of mind.
When life insurance was invented, it was never meant to be a permanent solution. It was devised to protect younger people building up their nest egg should something happen to the sole breadwinner. As they grew their wealth, they could let it go.
However, the life insurance industry today is dominated by life insurance salespeople driven by 130 per cent up-front commissions to sell you as much life insurance as possible, whether you need it or not.
So when it comes to “How much?” most people struggle, and invariably the correct answer starts with “It depends”. Your optimal insurance will depend on factors such as how old you are, whether you are single or married, whether you have children or not, and your financial commitments (such as debt and expenses).
‘Triggers’ in your life will likely change your life insurance needs. You should revise your insurance cover before you get married or have children. Likewise, you should revise it if you buy a property, take on significant debt, change jobs or if you are approaching retirement.
There are several types of life insurance – life (or, more accurately, ‘death’) insurance, Total and Permanent Disability insurance (for when a person is completely disabled and unable to work), trauma insurance (for the diagnosis of certain medical conditions) and income protection insurance (to replace up to 75 per cent of your income in case of accident, illness or major trauma).
Once you determine which type(s) of insurance policies you need, work out how much you need of each. On the one hand, TV advertisements tell you the answer can be found on a website. On the other hand, insurance salespeople will seek to sell you all the insurance under the sun. Chances are, the best answer for you is somewhere in the middle.
To help you, consider the following quick quiz.
If they were real, which of the following fictional characters do you think would most need life insurance: Bruce Wayne (Batman), Harry Potter, Fred Flintstone or Marge Simpson?
In a US survey 18 per cent said Batman, 16 per cent said Fred Flintstone, 15 per cent Harry Potter and 11 per cent Marge Simpson.
Batman is the wealthiest man in Gotham City and does not have a wife or dependent children. Despite his daredevil lifestyle, Batman has little need to protect either his assets or his income. His mature age ward will inherit his wealth.
Harry Potter is an orphan teenager who is the beneficiary of a (seemingly bottomless) Gringotts Bank trust fund TIM’S top tips for lif e insurance 0712-146 funding his private school education. Despite the best endeavours of Lord Voldemort, Harry has little need to protect either his income or assets. If you’re single with no dependents, as a general rule your need for life insurance is low.
Fred Flintstone is a middle-aged quarry worker while his wife Wilma is housewife extraordinaire managing a growing family. The family is entirely dependent on Fred’s income from his high-risk role, and an accident or death would have a huge impact on the family financially.
Like Wilma, Marge Simpson is a stay at home mum. Marge earns no income but performs the essential function of managing the household. If she died, Homer would seek to work even less than he does now to spend more time with the kids and pay for many household services that would be expensive to replace (which Marge currently does for ‘free’).
Clearly those in roles perceived as ‘risky’ or ‘safe’ do not automatically need (or not need) life insurance. As a general rule, life insurance replaces income and reduces debt to ensure you and your dependents are looked after.
Tim’s top tips for life insurance
Be wary of any advisors who accept life insurance commissions. APES 230 will raise the standard of insurance advice with its ban on commissions
Determine the debt you need to pay off (eg $400k mortgage)
Add your family’s ongoing expenses multiplied by the number of years you seek to support them for (eg $80k x 15 years). Be mindful that the survivor will likely earn less as they seek to spend more time with the family.