Don’t spend more on life insurance than you can afford
The thought of life insurance can be overwhelming, but it’s a practical matter that needs to be dealt with and discussed in your family. We insure our house, car and possessions but many of us don’t insure the one thing most precious to us.
Traditionally it was thought that a life insurance payout should pay off all of your debts and provide a life time income for your family. In real terms this means something like ten times your income! So even those on an average income with an average mortgage would need well in excess of $1 million of life cover. For most young families that just isn’t doable and as a result, many leave the issue in the too hard basket.
It makes sense to come up with a strategy that leaves your family in the best position possible without spending more on life insurance than you can afford.
So how much cover do you really need? Start by asking yourself these practical questions:
- How much would the loss of your income (or your partner’s) income leave your family short each month?
- Could some of that income be replaced?
- Would your family need to stay in the same house or could you downsize?
- If you own your own home, would it be less of a financial strain to sell the property and rent instead?
- How much capital would your family release by selling and how could that be put to work?
- How much time would your family need to make some of these decisions without being under any financial pressure?
The reality is that having some life insurance cover is better than having none at all. And because it isn’t the kind of thing you can chop and change easily, the cover you have should be affordable and sustainable.
You might consider having enough cover to simply clear the mortgage and any other debts, leaving your famiy with a sizeable asset that could be put to work. An alternative would be providing enough to replace your income for several years giving your loved ones significant breathing space to make the necessary adjustments.
However you choose to go about it, considering the problem and then purchasing as much cover as you can practically afford is better than doing nothing at all.
Advice kindly provided by Richard from QuickCover
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