Preparing for the unexpected
Investing comes with its share of risks, which can sometimes lead to partial or total loss of your savings. Assessing your financial situation and establishing safeguards before embarking on an investment journey is essential.
Life planning isn’t just about accumulating wealth; it’s about safeguarding the wellbeing of your loved ones. While contemplating worst-case scenarios can be challenging, preparing for the future is crucial to ensure your family is protected in the event of your passing. Life insurance plays a vital role in this preparation by providing a financial safety net that helps manage the unexpected.
Why life insurance matters
Life is unpredictable, and the financial consequences of an untimely death can be overwhelming for your family. Selecting the right life insurance policy involves more than just choosing an insurer. It requires determining the necessary coverage to minimise the financial burden on your family, considering their living expenses and any outstanding debts, such as a mortgage.
Not everyone may need life insurance – referred to as ‘life cover’ or ‘death cover’. However, if your family or other dependents rely on your income to cover living expenses or mortgage payments, having life insurance is essential. It provides security and peace of mind, ensuring that your loved ones can maintain their standard of living even in your absence.
Types of life Insurance
There are primarily two basic types of life insurance:
Term Life Insurance: This is the simplest and most affordable form of life insurance. It provides coverage for a specified period and pays a lump sum if you die within that term. There’s no investment element involved, making it a straightforward choice for many.
Whole-of-Life Insurance: This type of policy provides coverage throughout your life, guaranteeing a payout to your dependents whenever you pass away. The benefit is usually tax-free, offering additional financial security indefinitely.
Determining the right cover
When deciding on life insurance, you must ask yourself three key questions: What do I need to protect? How much coverage do I require? How long will I need the coverage? Consider your family’s living costs, outstanding liabilities such as a mortgage and future financial needs.
The right level of life insurance allows your dependents to manage financially in case of your premature death. You determine the sum assured – the amount you want the policy to pay out upon death. Regularly assessing your life insurance is crucial as life circumstances change. Failing to update your policy in response to significant life events may result in inadequate cover.
Factors affecting life insurance costs
The cost of a life insurance policy depends on several factors, including:
• Cover amount and policy length
• Your age, health and lifestyle
• Smoking habits
These factors help determine the premiums you will pay, making it essential to consider them carefully when selecting a policy.
Securing your family’s financial future
Life insurance relieves any debts and ensures enough investment to support your dependents. If you want to cover your mortgage, choose an amount equal to the outstanding debt, or consider a decreasing term policy where the death benefit decreases over the term of the policy, typically in line with a specific financial obligation, like a mortgage. Additionally, consider how family expenses would change if you passed
away, including increased necessities like childcare and potential drops in family income.
Additional considerations
• Cover provided by your employer or company pension scheme
• Existing policies and their adequacy
• Duration of your current savings
• State benefits that could provide extra support
• Impact of inflation on your coverage over time
To calculate how much life cover you need, consider the following steps and factors and assess your financial obligations:
Outstanding debts: Include your mortgage, personal loans and other debts that must be paid off.
Living expenses: Estimate your family’s annual living expenses, including housing, utilities, groceries and healthcare.
Consider future financial needs
Education costs: Factor in the price of your children’s education, from school to college.
Major life events: Consider future expenses like weddings or starting a business.
Income replacement: Determine how many years of income your family would need to maintain their current lifestyle. Multiply your annual income by the number of years you want to provide support.
Existing assets and savings: Subtract any savings, investments or existing life insurance policies that can be used to cover expenses.
Inflation: Consider the impact of inflation on future expenses and adjust your coverage amount accordingly.
Final expenses: Include costs for funeral expenses and any medical bills that may arise.
Obtain professional financial advice: Your financial adviser will help tailor your life insurance needs based on your specific circumstances and financial goals.
Peace of mind is a crucial component of a comprehensive financial plan
In conclusion, life insurance offers peace of mind and is a crucial component of a comprehensive financial plan. By preparing for the unexpected, you ensure that your loved ones are financially secure, no matter what the future holds. Taking proactive steps to assess your life insurance needs can provide invaluable reassurance for you and your family. Don’t leave it to chance – secure your financial future today.