It is not easy to approach the subject of death, but it is
something we will all have to face one day. The problem is,
we never know exactly when our time is up. Some may have adequate
warning, others may have none. In my years as a financial
adviser I have unfortunately seen the passing of a number
of clients. And not all were in their golden years; some were
in their prime and some departed in sudden, tragic circumstances.
Why we put off preparing for the inevitable
If we knew precisely when our time would be up we could plan
accordingly. Unfortunately since we are reluctant to face
the inevitable we tend to put off planning for it. Who wakes
up in the morning and says ‘Today’s a nice day;
I think I will take out a life insurance policy and write
a will!’ While we realise these things are necessary
we always have more pressing matters to attend to and believe
those tasks can be left to another day when we have more time.
Unfortunately we never find enough time! There are basically
two big issues that are neglected, namely life insurance and
planning for distribution of assets.
Life insurance – ‘dead money’ or essential
protection?
Taking life insurance first, the majority of people I speak
to do not have enough life cover to ensure their families
are adequately catered for in the event of their sudden death.
This is especially so in the case of many expatriates living
in Bali. The exceptions who do not need life cover are single
persons with no dependents and those who have built up assets
sufficient to ensure their dependents will continue to maintain
the standard of living they are accustomed to. Some expatriates
have an element of life cover, perhaps the equivalent of two
or three years’ salary, in their job contracts. Whilst
this may appear on the surface to be a significant sum it
could be grossly inadequate where there are younger children
to support. If you are in such a situation, just spend twenty
minutes or so calculating how much your family would need.
Higher education costs alone could reach tens of thousands
of dollars. If you are the breadwinner and your spouse depends
on you then you are looking at a very large sum. In most cases
I would say that life cover should be somewhere between half
a million and a million US Dollars. Half a million would generate
an income of around $2,000 a month. Adequate perhaps, but
by no means a fortune.
Is the cost of insurance prohibitive?
If you are relatively young (under 45) and in good health,
basic insurance can be inexpensive. There are many types of
insurance available. Some can be combined with savings plans
which in turn can either self-fund the plan later on or provide
you with a surrender value. If you purchase a property in
the UK you will usually need to cover the mortgage with an
insurance policy. This is where endowment policies come in
but they have run into big problems since the maturity values
often turned out to be insufficient to cover the balance of
the mortgage on maturity. I personally prefer to separate
protection from investment as they represent two very different
needs. The cheapest form of life cover would be a simple policy
to cover you from year to year. The initial premium would
be quite low but it would rise steadily with each year of
age. And if your circumstances changed you might find it difficult
to renew cover. A better concept is level term assurance.
Here you select the number of years of the term, perhaps ten,
fifteen or twenty, and when your application is accepted by
the underwriters you will pay a fixed premium every year.
So long as you maintain the premium life cover is guaranteed
even if your health deteriorates in the meantime. There is
no surrender value however and at the end of the term cover
will cease. Hopefully by then your children will be off your
hands and you will have built up sufficient assets to ensure
your family’s financial independence. The cost of term
assurance will depend on your age and medical condition, but
even cover of $500,000 can cost less than a couple of hundred
dollars a month if you are young and in good health. Beware
however; if you are a smoker the cost of life cover could
be double that of a non-smoker!
When should you take out cover?
If you have dependents to protect and limited assets then
the answer is as soon as possible! Bear in mind the insurance
companies take great care before they accept the risk. The
process of medicals and underwriting can mean a delay of six
weeks or longer from the time of application before cover
is in place. If you are young and in good health don’t
wait until you are old and sick; it will be too late to get
covered! And don’t wait until you have a serious accident
or until the doctor tells you ‘I’m sorry, but
you have a problem’. If the problem is a serious one
no insurance company will want to know you. Should you obtain
cover and subsequently die the insurance company may still
not pay out if it is determined that you had a ‘pre-existing
condition’ – even if you were unaware of it! So
if you need to protect your family, don’t put insurance
off another day; when you realise how badly you need it, it
may be too late!
In my next article I will cover the other often neglected
issue, planning for the proper distribution of assets upon
death. Failing to plan can cause further misery for the family
and can prove very costly. But more about that next time!
Colin Bloodworth is a senior financial adviser with Financial
Partners International. The views expressed are his own. If
you have any questions relating to personal finance you may
contact him at 021 520 8099 or colin.bloodworth@financial-partners.biz
