Protecting your family – the role of life insurance
Financial planning is the process of organising our personal finances to ensure we meet our personal life goals, whatever they may be. As individuals, we have our own dreams and aspirations for our lives and those of our family, but collectively we all face the same possibility - dying before we realise those dreams.
We can all save for our retirement, our daughter’s wedding, our children’s first car or home, but unfortunately we cannot be sure that we will be there to see them happen.
In 2010, there were 119 deaths in Malta which were recorded as “external causes”, meaning traffic accidents, falls and other non-medical reasons. In the same year, 20% of the 3,010 people who died were aged under 65.
While planning and saving for a wedding or our dream holiday should be fun and rewarding, planning for our untimely death isn’t, and that’s why so many people choose to ignore it. If you have plans for the future which involve other people, would you still want them to fulfil those plans if you were no longer around? Would you want your daughter to have the best wedding imaginable? Would you want your partner to have a long and comfortable retirement? Most of us would answer yes to these questions and this is where life insurance helps.
When you buy your first home and take a loan from a bank they will require you to take a life insurance policy. This is because they understand how valuable you are and know if you were to die before the loan is repaid, then your spouse might find it difficult to make the monthly repayments. The bank is protecting itself against your loss because they understand the implications of a partner dying. Unfortunately, they see it happen on a regular basis.
We need to think more like a bank and consider what financial impact our death would have on those we leave behind. How much money would our partner and our family need?
In order to answer that question we first need to evaluate our existing assets (what we own) against our current liabilities (what we owe). If there is a shortfall, then there is an immediate need for life insurance. Most of us will have loans and debts protected, but the next step to calculating how much life insurance we need is crucial.
We need to consider our daily living expenses and deduct anything which will no longer be required once we have died; for example, if you are paying €500 per month on a home loan which will be repaid on death then the monthly repayments will stop. Other expenses which can be ignored include our work related expenses (travel, clothes, food, etc). Apart from those expenses, most other household costs remain the same.
Once you have calculated how much income the household will need when you are gone, then you need to think about how long they will need it for. If you have children, then typically we would suggest until your youngest child is 16, 18 or 21, depending on what level of education you expect them to achieve.
Multiplying how much they need by the number of years they need it for gives you a figure – often a large figure. That is the amount of life cover your family needs if you died yesterday. You need to do the same exercise for your partner. If they not working because they are staying at home to look after the children, then you need to consider the cost of replacing them if they died. This can be extremely difficult however, a recent survey in the UK calculated the value of a parent (by looking at all the jobs they do – childcare, washing, shopping, cooking, cleaning, etc) to be approximately £35,000 per annum.
Charles and Ruth married in 2006 and have two young children – Lily, aged 12 months, and Poppy, aged 3 years. Charles works in a local bank and brings home a salary of €1,600 a month after taxes; Ruth is a housewife. They have a home loan which costs them €450 per month and a life policy to cover the loan which costs €20 per month. Charles spends €150 per month on travel to work and other work related expenses.
If Charles died yesterday, then the life insurance policy would repay the bank loan and stop. Ruth would no longer have to pay the monthly repayments or the life insurance policy and would save the €150 Charles spent going to work. Ruth would therefore need €980 per month (€1,600-450-20-150) in order to have the same money at her disposal for the family as they had when Charles was alive.
Charles and Ruth had always wanted their children to have the opportunity to go to university and so want a life insurance policy for the next 20 years, until Lily is aged 21. They therefore need a policy to cover Charles for €235,200 (€980 per month x 12 x 20 years).
This amount would ensure the family’s life could continue as Charles had planned even though he is not there to share it with them.
Stuart Fairbairn is Chief Officer at MSV Life.
For more information visit www.msvlife.com.
MSV Life plc is authorised by the Malta Financial Services Authority to carry on long term business under the Insurance Business Act 1998.