You May Need More Life Insurance Than You Think

It often seems like the only people that don't buy life insurance are the ones who actually need it most. It's depressing when I meet with a widow or widower and learn of their terrible financial position due to the loss of a loved one. I had the pleasure of serving on the board of a local non-profit which provides grief support for those who have lost a loved one, so I have unique perspective in this area beyond just life insurance. The financial challenges of losing a loved one for young people and older people are similar yet different. Similar because it ultimately boils down to cash flow, but the cash flow covers different needs. Younger peoples have children to provide for and also tend to have more debt. But retirees can also run into trouble if they haven't saved well enough. That's because the smaller of their Social Security benefits will go away. If you depend on both partners' Social Security, it can be costly and painful to lose the smaller of the two.

How to Estimate Your Life Insurance Needs

 

So how much insurance is needed? For most families, I use three simple factors: debt, education, and income replacement.

The debt is simple. Just add up your mortgage, credit cards, and other debts. Some mortgage with Mortgage Reducing Term Assurance (MRTA) are forgiven upon death, but privately funded loans will still need to be paid back. I think it is important to have all the debt settled to improve cash flow and eliminate the emotional toll debt can leave us with when someone passes away. The emotional distress on a family after a loss is hard enough.

For education, figure approximately 30,000 per year per child for local college's tuition and living expenses in 2013. I like to see college 100% funded through life insurance, the education of your children is the foundation of your legacy!

Income replacement is a bit misleading because I don't really care how much you make, rather it's how much you spend. We need at least five years of support, but 10 years is optimal. If you have young children, don't forget that social security will chip in until they're age 18 if you have earned enough, nor until they reach age 25.

As an example, let's look at a family of four with a 300,000 mortgage and two young children. The husband makes 100,000 annually and the wife stays at home with kids, their cost of living is 3,000 per month after taxes. This family has 300,000 in debt and are estimating 240,000 in education funding (30,000 x 4 years = 120,000 per child). So the income replacement needed is 360,000 or 3,000 per month for ten years.

The total life insurance coverage that the husband needs is 900,000. Even though the wife is not working, the potential life insurance need for her would be about 540,000. Even though the household income is not tied to her, we still want to have the mortgage and education taken care of in the event of premature death.

My philosophy for life insurance coverage is to keep it simple and load up on a large amount of insurance at the lowest price possible with a high-quality carrier. In general, most people are under-insured. Please consider your needs by following my formula illustrated above: debt, education, and income replacement. You will be surprised how inexpensive it is to fully protect your family!

6 Simple Steps to Become Financially Stable

BUY LIFE INSURANCE

If there is someone in your home who relies on your income, then you need to buy life insurance. Sometimes even young, single people take out a small life insurance policy so their parents aren't burdened if something happens to them. If you have children, this is an absolute must and non-negotiable. Financial experts recommend that you take your yearly income and multiply it by 7-10 to find out how much insurance coverage you need. I also recommend term life insurance not whole life insurance as it's much more affordable. If you've avoided purchasing life insurance because you don't know where to start or what to buy, contact a certified life practitioner to do a proper financial analysis for yourself just like a doctor who will do the necessary diagnosis before prescribing medicine. They will simplify the process by giving you a range of financial needs all at once and help you find the coverage you need at a price you can afford. 

START AN EMERGENCY FUND

An emergency fund is the more important step to take when you want to make your way to financial independence. Starting with small savings is ideal but eventually this emergency fund should be 3-6 months of expenses. The reason an emergency fund is so important is because you can't get ahead when paying off your debt or investing if you're constantly using your daily cash flow to put out fires. If your car breaks down or you loss your smart phone, an emergency fund will allow you to fix those problems without affecting your monthly budget.

INCREASE YOUR RETIREMENT SAVINGS

If you work from 8-5 job, go right to your HR department and increase your retirement savings by at least 1 percent. Chances are, you won't even notice that 1 percent. If you get a raise or have an exciting work bonus, increase your retirement savings even more. Making your retirement savings a priority will not only make you feel secure about your future but it will give you a nice cushion just in case you decide to change careers or want to retire sooner than expected.

LEARN MORE ABOUT INVESTING

Even the most seasoned investor can always learn more. And, for all the beginners out there, investing is not as difficult as it seems. What makes investing challenging at first is that it's like a different language. There are so many terms like index, funds, bonds, mutual funds and more so it can be hard to understand at first, much like your first foreign language class. Eventually, though, the more you read, the more you will understand. Buy some investing books to read that helps you learn about investing by investing your spare change.

MAKE A WILL

That's a lot of people in Malaysia don't have a will. However, making a will is a very selfless act that you can do for your family. It makes things much easier after you've passed away because you have a very specific directive on how you want your estate to be handled. If you don't have a significant amount of assets, creating a will can actually be quite simple and you can do it yourself. If you have a lot of assets or any other complicating factors, look up an estate planner today and make an appointment. Again, it's one of those things that takes time and energy, but it's truly a gift to your family in the long run.

START A CHILD EDUCATION FUND

Lastly, if you have children, start an education fund for them. College prices are skyrocketing and student loan debt is out of control. In order to give your children the gift of graduating debt free, it's important to start as early as possible. If you don't have children but you want to go back to school, starting an education fund is also a good idea. After all, if you're going back to school to enhance your skills or advance your career, it's far better to go completely debt free.

Ultimately, if you want to get in better financial shape right now, it is possible if you start with a plan. Doing so will not only allow you to become more financially stable, but it will help you become more confident with your finances.