Dealing with the financial mess afterwards
Yes, we're talking life cover, sufficient for your needs but not so much that it impacts your ability to cover the other 'living' situations you need cover for.
One of the major misunderstood points about life insurance is; life insurance refers to the product range that covers your life, life cover is a particular benefit of life insurance that pays when someone dies or is terminally ill.
This is where the journey to under insurance starts, with that one misunderstanding.
To be honest, we've probably interchanged the term ourselves on this site. Where we pick it up and find it, we'll change it to the appropriate context, but it's easily done.
Sort of our point, it can be easily confused.
Ok life cover, pretty straight forward; Someone dies, a death certificate gets issued, it gets matched to a policy document and a sum of money gets paid.
Well, that's what happens most of the time. As we said earlier that's the clinical bit; you can find more of them here.
What's more important, is what you're going to do with it?
It's all well and good to be told 'You look like a million bucks' here's your million dollar life cover policy, but what are you really going to do with it?
Like a lotto win, a million dollar policy without a reason is going to cause all sorts issues, usually with family and extended relations.
It is money that is wanting, wanting to find trouble. Life cover that is well planned and has a purpose can be very constructive, even when they are in the millions and surprisingly so even when there's loss of a family member.
No, I'm not saying wealthier dead than alive, though maybe aspects of your financial position may improve.
What I'm saying is some of the opportunity's previously dreamed of, can more easily become reality.
Sure it would be better to have the loved one with you, but equally, they can be comforted by the knowledge that those dreams can and will be realised.
Yes jumping into the deep end of the deep and meaningful pool here.
What don't I know, that the basic product information isn't telling me?
This is a great question to be asking, as the product brochure won't tell you about the following.
- The individual's risk of death before the age of retirement is about 4-5%. Yes, many people do die before retirement, but statistically, the number is quite low compared to the general population. If you're 60 and have had several friends pass away within a few years, it certainly doesn't feel like 4-5%, but it is just a matter of perspective. Someone at 60 is more likely to make it to 80 than the 30-year-old standing next to them.
- If you die in an accident, ACC will provide, what they call fatal entitlements, to your family for a period of time, more here on that.
- The majority of large life cover policies don't make it through the assured's lifetime without getting changed in some way.
- A large life cover policy taken young will suppress your budget to purchase more useful and important medical and disability benefits.
- Dying isn't the most critical or challenging risk you face, though life cover is often seen as the most important cover. This is for loved ones.
Hang on this is a site about selling me insurance.
Yes, it is, appropriate amounts of insurance cover under the appropriate benefits for your situation.
Which is the point? People overstate the life cover risk in their own minds; they also overstate the likelihood of coming to a sudden stop rather than slowly dying.
To be perfectly honest the sudden stop is appealing, far less drawn out and a lot less painful.
The reality is we're going to suffer from medical conditions that are going to be annoying, painful, challenging and ultimately will kill us at some point.
Which is why you do need life cover.
Along with the overstated risk of dying suddenly, people are also in denial about the fact that we have a fixed term on this ball of mud.
No one gets out alive.
Partly this attitude is what gets people out of bed in the morning; people are fundamentally optimistic.
Which is also why reviewing life insurance is often the last thing on the todo list.
Just don't leave it too late!
Life is about living, it's not about getting up going to work to pay the mortgage and insurance premiums, it's about your life and lifestyle!
So what might you need life cover for?
- The big one that concerns everyone is debt. Mortgage debt, finance debt & credit card debt. This fundamentally drives a significant portion of the life cover amounts and also the need to get life cover.
- Funeral and final expenses. Not just the funeral service but other related costs that do come up. It might be family members need to travel from overseas, read the broke kids in London. It may be legal fees to manage the estate too.
- Pocket change, sufficient funds to soak up unanticipated costs that have been incurred, there's almost always some.
- It might be you want to make sure you don't have to work while living with a terminal illness, sufficient for the household not to work.
- It may take time for family members to recover, so supporting incomes for a period afterwards may be required. With Auckland mortgages and two incomes, it's often the case that once paying the mortgage off; the survivors income will maintain the family's lifestyle. If there's an imbalance, then additional cover should be considered. Outside of Auckland, it's more likely to be a shortfall if the primary earner passes away, though this is changing.
- It maybe a bunch of dreams and goals your family have that need supporting
- It could be you have or intend on funding education for the kids.
- If in business, and we talk about it here, making sure the value of the share in the business are realised for your family.
Actually, there are many reasons to have life insurance; those are the common ones.
Be realistic about your situation, you don't want to carry an extra cover for a long time and drop it for affordability reasons later.
The extra premiums paid will be a waste of money and insurance companies make a lot of money off policies people have paid for and been over-insured for.
Don't be one of them, give us a call!
What else do I need to know?
Life cover is pretty simple in the scheme of insurance; it's one of the simplest policies. It is also one of the most versatile and also the most critical to get structure advice on.
When we say structure advice, we mean it in two ways. Premiums and Ownership.
Let's tackle premiums first
In the advice discussion, it's the first part of the discussion. With premiums, like your mortgage rates, fixed and floating, we have something similar with life cover.
Typically most people have the floating version, called yearly renewable or rate for age. It's cheapest now, but it gets more expensive with age.
Yes it goes up every year because you are a year older.
There are a few other ways to structure premiums with Life cover, all on one policy or a mix across a number of benefits for your needs.
This is for the fixed rates versions.
Where you take a cover that is a fixed premium for a number of years, 5 or 10 or maybe to age 65 or older.
These policies start more expensive than the floating version but don't go up every year. At the end of the fixed term, they will jump to the floating rate at the time. So it's important to structure it well.
A well-structured life cover plan can save you $10's of $000's over the term of the contract when compared to the floating version.
My own personal policy is going to be about $210,000 cheaper than the floating option.
I don't expect to use it because I really don't need it as I'm going to live forever ;) but I still have it for my family.
What about the ownership structure?
Ownership structure is critically important, where does the money need to go?
If it turns up in your estate but it's destined to pay the mortgage off, but the mortgage is in the trust. You have a problem.
The money is in the estate, and the Will will operate on it, maybe not discharging any or enough for your family.
Maybe there are business liabilities that soaked it up. Many many things can go wrong with life cover being delivered to the estate, most of the time it's ok. Sometimes it's a nightmare.
The biggest issue is people don't have current Will's, so the life cover turns up and gets posted to mum's auntie's cousin's nephew. Ok not that bad, but you get my point, it's not with the intended recipients.
Getting ownership structures right is important to ensure the money arrives where it is supposed to, where it will do what it is intended. If you don't have a will, go and get one, for the $100-150 it costs, it'll save you many many times that when it comes to managing your estate.