Protecting your Family Financially
Great financial planning means making sure your family is protected financially if the worst-case scenario happens. However, many people suffer in the long run from not having the right advice at the right time. Wealth management does not only involve ‘making money’ and creating investment portfolios – we need to cover the essentials first before these desirable goals are reached. When children are involved this becomes especially important to consider.
It is not hard to imagine the stress and problems that would follow from either yours or your spouse’s income stopping suddenly and unexpectedly. From having to worry about how important bills are going to be paid, to thinking about leaving the country to live somewhere else, life would be a lot easier if you could guarantee financial security. For this reason, the first aspect of financial planning that should be considered is life insurance, to protect your family’s lifestyle.
The easiest way to figure out a good level of cover is to see how much of the deceased person’s income you would want to replace in order to maintain financial security. A good rule of thumb is to purchase a policy that would allow your family to live off of the capital of the payout – use a budget to figure out how much your family spends annually, then work backwards to determine the adequate cover.
Of course, there are differing types of life insurance. Level term life insurance is designed to pay out a fixed sum if you die during a fixed period of time (the term) – the payout remains the same and the premiums are fixed. On the other hand, decreasing term life insurance has its cover (sum assured) reduce over time. This policy is often used in conjunction with a mortgage; as the principle on the mortgage is gradually paid off, the life insurance cover decreases roughly in line with it, as shown graphically below.
So, level term insurance provides a lump sum that may provide greater family protection, as the payout is not specific to mortgage debt, unlike decreasing term insurance. However, as a general rule, level term insurance premiums are about 20% dearer than decreasing term. This provides a clear choice between the two policies. There is no definitive right or wrong answer to protecting your family and your home – it depends on your specific needs, and whether the premiums fit into your planned budget.
If you have any further questions regarding life insurance and financial planning, please contact Graeme Field (Director and Head of Corporate Services, Credence International) at [email protected]