How likely are you to claim life insurance?
Insurance is about managing risk. It’s a simple concept where many people pool funds together and then funds are paid out to people who need it. With so many people contributing to such a large pool of funds, there needs to be a line drawn in the sand of who gets paid these funds and when. This is where policy wording determines and defines what is fair and what is not and who gets paid and who may not. It simply cannot be a free for all “everyone gets paid all the time”, because that would not work for anyone.
When taking out a life insurance policy, you have to determine what you prepared to pay for (the benefits) and what risk you are prepared to accept yourself. Problems occur when there is not a clear understanding of this.
Life insurance companies look at the likelihood of a claim, and it makes sense that you, as a consumer should also consider the likelihood of a claim. This way, you can decide what you are prepared to pay in the form of a monthly premium and what you are not prepared to pay…in short what budget restraints you have.
How likely are you to claim on a life insurance benefit?
The following illustration is taken from independent research QP Research and the likelihood of one of these events before age 65.
- Dying 17%
- Suffering a Critical Illness 25%
- Becoming Total and Permanent Disabled 9%
- Becoming Temporary Disabled for up to 6 months 27%
How much life insurance could you afford?
Now that you have thought about the likelihood and the risk of needing cover, the next logical step is to decide how much cover you need. Here are my 5 basic rules of deciding what minimum amount of life insurance you need. Numbers 1 and 2 are no brainers. If you are not prepared to do these, then maybe you should stop reading here and go and watch some YouTube videos.
- Total up all your outstanding debts, and how much you would need to repay them all.
- Take and estimate of any funeral costs and legal expenses which may be incurred.
- How much would it take to run your household for 6 months and to also take a break and maybe get away for a while.
- If you are a single income household, then you need to decide how much the primary income earner would need to be insured for so the lost household income to be received for a period of time to make sure your family is looked after. This period of time could be as little as a year, or even up to the ages when your children will no longer be financially dependent and can provide and earn for themselves.
- Do not under any circumstances under estimate the non income earner of the household. If you partner is taking full time care of your children and not earning an income (but working as hard as anyone else!), then what would be the cost to leave your job and do the same? or hire someone else to come in and do the daily duties and take care of your children while you continued your employment?
Take time out to think about the likelihood of a life insurance claim and how it would impact you, then how much you would need.
I do use the term life insurance loosely as this can cover a number of different types of life insurance benefits such as basic life cover when the insured person dies, trauma cover when the insured person contracts a serious illness, Total Disablement Cover when you become so incapacitated that you cannot continue your job, and so on.
So get to it and don’t make the top 5 mistakes people make when taking out life insurance, and as always, if you need any advice, please contact me and I would be more than happy to talk with you and assist you where I can.