Tuesday, February 02, 2010

Life insurance coverage and monitoring

One of the things we value is certainty and predictability. It would be good if everything stayed the same so that, once we have put everything in place, we could just lie back and let life pass us by. Unfortunately, life has a nasty habit of waking us up. If we are lucky, the plans we laid cover the emergency. If not, it's a case of picking up the pieces, working through the problems and putting new plans in place for the next time. But then there are the problems that creep up on us without any fanfares to announce their arrival. One morning we wake up and, when we look around, we find things are not the same. Welcome to the phenomenon of inflation. This is where the prices of goods and services slowly rise over time. The purchasing power of our weekly or monthly paycheck drops. With some persuasion, our employers reluctantly increase the pay and make up the difference. The result is a steady erosion in the value of the dollar. What was a good sum twenty years ago becomes a pittance today. This represents a subtle threat. Unless you actually think about the adequacy of your insurance coverage, you just drift on paying the instalments. If the worst happens, your dependents then find out there is enough to cover the cost of the funeral and pay the family outgoings only for a month or so.

In a recent survey of financial preparedness, the answers show that about 60% of all adult Americans have coverage representing less than three times their net annual income. In many cases, this amount would not be enough to clear off the outstanding mortgage on the family home let alone provide a lump sum to tide people over until the loss of income can be recovered. But the detail of financial planning is about more than a simple formula. Some industry professionals recommend coverage representing not less than six or seven times the net annual income. But it's always better to start with the estimated level of debts. We start with the mortgage and any other loans secured on the family home. Although these amounts should slowly fall during your lifetime, many people actually maintain or increase the amount borrowed. This may be to trade up in the quality of the home or to release some of the housing equity as cash. The first priority should be to ensure that the family's occupation of the home will not be threatened. Now add in the unsecured debts in overdrafts and on credit and store cards. Then what are the longer term plans to pay for your children's college education? The number of dependents and their needs change during your life so keeping the amount of coverage the same is always an option. But, in most cases, inflation-proofing is the better choice, particularly if the policy has a cash value. This gives you more personal security later in life.

Life insurance planning is all about monitoring the needs of your dependents and assessing how much will be required to replace your earning power. When you are starting off, always get the maximum number of life insurance quotes. It's also a good idea to take independent professional advice on the strategies to apply over your lifetime to get the most value out of the policy you buy.




© 2010 Ranjan Kumar

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