Life Insurance – The Good, The Bad and The Darn Right Ugly
Dashing out the door to go play in the road (quite literally) in the dusty town of Potgietersrus where my mum grew up, my Gran would shout after us…
❝
Make sure you’ve got clean knickers on – if you’re in an
accident you don’t want dirty knickers showing!
❞
Did you get weird advice like that from your Gran too?
I always thought that the state of my knickers would be the least of my problems if I were in an accident, but looking back I think it’s much cooler advice than…
“Don’t go play, it’s dangerous out there”
► REALITY CHECK ◄
Life is risky – that’s what makes it life!
So instead of living in fear, do what the Boy Scouts and Girl Guides advise…
be prepared for life’s “to be expected unexpected events”…
…then get out there and play at this glorious thing called your life!
The grown-up equivalent of being caught with dirty knickers is having inadequate or wrong insurances in place.
Considering how important they are, it's frightening how many people have their proverbial knickers in a knot in this department.
So let’s get you sorted.
Watch this video to learn how you could be saving THOUSANDS on life insurance.
There are only three categories of insurance you need to consider and the first of these is life insurance.
⏩ KNOW THIS ⏪
Just because you have a life doesn’t mean you need life insurance!
Take this little quiz to see if you need it, how much, what type and for how long.
DO YOU NEED LIFE INSURANCE?
With life insurance I typically find people in two camps.
► The Total Denialists who find out the hard way that DeNile – is not a river in Egypt! These are people who believe bad things just won’t happen to them or can’t face even thinking about bad stuff.
They have no cover and don’t want to talk about it.
► Then I meet the other camp – the Chicken Littles.
These are people who have been filled with so much fear and dread by financial advisers and insurance salesmen that they have too much insurance – numerous life insurance policies, dread disease policies, critical illness policies, and a whole pile of other stuff, providing way more coverage than they need, often when they don’t even need it. Making the person who sold them all these policies a lot of money and themselves poorer.
These are the criteria to know if you need life insurance:
- If someone depends on your income to survive;
and
- If you don’t yet have sufficient assets to provide that income if you were not there.
Life insurance is not some sort of death lottery.
Life insurance is not there to be a jackpot for your family to soften the blow of you shuffling off this mortal coil. It is only ever meant to be a filler – to fill the gap between the value of your current assets and the value needed to replace your earned income.
Do you have people who need your income to survive?
- YES – continue reading…
- NO – go out and play
Do you have assets that can earn that income in your place?
- YES – go out and play, you don’t need life insurance
- NO – continue reading, you need life insurance
A special note for stay-at-home parents:
Just because you don’t bring in an income (or a
smaller proportion of the household income) does not
mean that you don’t need life insurance.
If you were to die, your partner or spouse would have to either hire someone else to look after the kids or stop working themselves. This costs money – you need to ensure that the money is there if you are not.
HOW MUCH LIFE INSURANCE DO YOU NEED?
So, you’ve determined that you need life insurance (otherwise you should be out playing!).
So how much do you need?
Remember – life insurance is to give your dependants a payout which fills the gap between your current Net Worth and the Net Worth you need to earn the income they need to live.
Let’s work out how much you need.
Before we can do that you need to learn a few definitions.
- Death Benefit: The money your beneficiaries receive upon your death. For example, a $5,000,000 life insurance policy has a $5,000,000 death benefit. Assuming the insured person dies while the policy is active (what’s called “in force” by the insurance industry), the beneficiaries of the policy will receive a $5,000,000 payout. This is typically tax free.
- Capital: This is the actual amount of the death-benefit payout received.
- Income: This is the interest/income that can be earned by investing the payout (or capital).
Cool. So how big a life insurance policy do you need?
You should have a big enough policy so that your beneficiaries can live off the income/interest earned by your current assets plus the payout alone; they should not need to eat into the capital to survive.
STEP 1 – WHAT IS THE VALUE OF THE ASSETS YOU ALREADY HAVE?
Get yourself a copy of The Wealth Chef book, go to page 76 and calculate what your current net worth is.
This is the value of your current assets minus your liabilities.
STEP 2 – HOW MUCH DO YOUR DEPENDANTS NEED IN TOTAL?
Work out the monthly income your dependents need to live on, multiply that by 12 to get an annual income and divide that by 0.08.
This assumes your assets and the insurance payout will earn income based on an 8% interest rate or total rate of return.
Let’s say your dependents need a monthly income of $33,000 to live off without touching the capital amount. To earn a $33,000 monthly income you will need a capital amount of $5,000,000 from the death benefit.
In the Mapping Your Freedom Path masterclass we go deep into how you determine what net worth you need at various stages of your freedom path. Go here to get the masterclass.
STEP 3 – WHAT’S THE GAP?
Subtract your current net worth from the total capital amount you calculated in step 2. This tells you the amount of life insurance you need.
Let’s say your current net worth is $1,000,000 and you’ve calculated you need a capital amount of $5,000,000 to earn your dependants the income they need. Then the life insurance you need to fill the gap is $4,000,000. Simple!
I am purposely using pretty big numbers. What you actually need is determined by your family circumstances.
It is your personal financial numbers that matter – nobody but you can determine what that amount is.
So do not let some financial product sales person tell you how big your life insurance policy should be.
If you don’t know your unique financial freedom path number go grab the Mapping Your Freedom Path masterclass now.
WHAT TYPE OF LIFE INSURANCE DO YOU NEED?
A life insurance broker (salesperson) will try to tell you that you need a super-duper expensive life insurance policy that will cover you for your entire life. This is called Whole Life Cover.
That’s the DARN RIGHT UGLY ONE!
You don’t need Whole Life Cover. Don’t fall for their fear tactics and smooth sales talk.
What you want is term life insurance!
Term Life cover (THE GOOD ONE) means it is life cover for a period of time, or term (usually one year).
Life insurance is meant to provide financial protection for:
- Those dependent on you up to the point when they are no longer dependent on you; and
- During the time you are building up your assets.
Once you have sufficient assets that are able to earn a healthy income on which your dependants can fall back if you die, you no longer need life insurance.
HOW LONG DO YOU NEED IT FOR?
Those people who are dependent on you today will hopefully not be dependent on you in years to come.
Real dependants are not adult children you choose to subsidise! That's called codependency.
As the size of your asset base grows and as your dependants get closer to being independent, the size of the cover you need should reduce until you don’t need it any longer.
So for most people, you should need a life term insurance policy for no longer than twenty to twenty five years max, and as a great Wealth Chef you will need it for a much shorter period because you are growing your net worth with juicy wealth generating assets.
Estimate how long your dependents will be living off you and how long you believe it will take you to achieve your financial freedom net worth number.
Whichever is the shorter time – that’s the time you need cover for.
So there you have it – your knickers are no longer in a knot and you can go out and play!
P.S Watch this video where I guide you through understanding Life Insurance and I speak to an industry expert guiding you through the importance of selecting the right 'risk' insurance for you, what type of broker to select and understanding what is right for you.
