Life Insurance Insuring against financial loss

Press, 26 July 1989, Page 12

Life Insurance Insuring against financial loss

Sheryl Nicholls

MONEY Management

For many people life insurance is not essential. The only time life!insurance is required is lif the death of any person iwould cause a financial Idss. It often surprises me that a car or house is insured automatically, whereas a breadwinher or a key person in a business whose death will bring a financial loss to the family or business is not insured. There are two sorts of contracts on the market, term or temporary insurance, and permanent policies. Term or temporary Insurance This type of cover works the same way a house or car insurance does. A small premium is paid, and only on the death of the life insured is any money paid out. There is no savings or cash value in this contract. An example of a premium for $lOO,OOO cover for a 35-year-old male is $192.00 per annum — or for a 35-year-old female — $190.80 per annum. You will note that the premium for the female is cheaper than that of the male. Because women live longer than men, the level of risk that the insurance company is taking by providing the cover decreases. j Term policies can now be inflation adjusted so one can keep pace with rising values. In the past additional policies had to be effected for higher cover. These sorts of contracts are not suitable if cover is required for a long period, say after age 40 to 45, as premiums increase with age. Permanent ; policies The other main ' group of life insurance contracts is classed as Permanent Policies. These whole of life, endowment, and the unbundled policies.

(Unbundled policies are

relatively new products and are used primarily for retirement funding which will be discussed in the next two articles). These permanent contracts are more expensive than term insurance. This is because there is, in addition to the life cover element, a saving element. In other words, each dollar you pay is split two ways, one portion going to the cost of life cover, the other portion is invested by the life company to give you a return on your money. The premiums remain level for the term of the policy. Before purchasing Life Insurance it is important to establish what sum insured is required. The calculation of necessary life cover is often referred to as estate planning. A typical example which would apply to either of two working parents with dependents would be as follows. (1.) Lump Sum To Produce Income — say — $150,000 (at 10 per cent this will give $15,000 per year). (2.) Lump Sum To Pay Existing Debts (credit card, monthly accounts, funeral expenses) — $lO,OOO. (3.) Funds for Children’s Education — say — $20,000. (4.) Funds for Replacing Whitewafe, Vehicle etc if required — say — $20,000. TOTAL — $200,000. Insurance provision for a wife who provides support to the joint economic unit by performing unwaged duties such as housekeeping and childminding is often neglected. Should the wife predecease her husband, the employment of a waged housekeeper/childminder could cause her partner substantial financial hardship if she is uninsured. One of the other factors to consider is policy ownership. In my opinion, im a partnership, it is essential to “cross assign” policies. This means that, for

example, a wife would be the legal owner of her husband’s policy and vice versa. If this is not done, and the partner dies, the policy proceeds are paid into the estate.

It is difficult enough to cope with the death of a loved one without having money worries as well. If your policies are not cross-assigned, simply call your insurance company, which will arrange this at no charge. Whole of Life A whole of life contract will cover the life insured until his or her death. These contracts are ideal for those who require life cover for the whole of their life — in a situation where, for example, a family may need to pay death duties. These contracts have bonuses credited to them which increases the sum insured and the cash value each year. The most popular concept with these contracts is that of self-funding. After a certain period, usually five to eight years, depending on the company and its returns, the premium for the policy can be funded out of its cash value. This means that after the five to eight years premiums are no longer payable. If, however, one continues’ to pay premiums

you can end with a substantial sum of money which can be used for retirement funding or any other purpose. Endowments

Unlike whole of life policies, with endowments a redemption date is selected. These contracts are popular among my clients who are rotten savers.

These are usually the sorts of contracts parents purchase for children. The intent is that the child will receive a generous lump sum at say, 21 years of age. The generous sum, however, does not eventuate. This brings us to an important point which applies to all forms of investment. The value of the contributions or premiums is eroding with time. AH policies, and indeed all investments, need to be updated to keep pace with inflation.

Like the whole of life, contributions are split, but a larger portion of the dollars goes into investment, and a smaller portion into the life cover. To sum up:

I do not recommend any one type of Insurance over another. Each person must assess their long and short term needs for Life Insurance then purchase cover accordingly.