When you first took out life insurance, you probably thought it was expensive. In hindsight, you might now think that it was cheap compared to what you’re paying now.
Life insurance, and any personal insurance such as income or trauma insurance, increases in cost as you age. Not so much in your 30s or 40s, but once you hit 50 you’ll definitely notice a sharp increase in premiums.
How do you manage the cost? By making sure that your cover levels are appropriate to your current need. If the insurer keeps increasing your cover by inflation, do you really need this? If your mortgage is going down, why is your life cover going up?
With a few exceptions, most people take out life insurance to cover three things:
Final expenses – the ground or the oven
Debt – Repaying the mortgage
Dependency – Replacing your income when you’re no longer here.
This is my take on these three components:
Final expenses – these may change with inflation, but otherwise should be fairly static.
Debt – Unless you upgrade your house, your mortgage should be coming down. Make sure your mortgage cover reduces too.
Dependency cover is usually for kids. But I have clients where one spouse has never worked and would find it difficult to get a job. This is why there is no one-size-fits-all approach. The age of independence for children also varies. Some clients what enough money to cover their lost income until the kids are through university. Others have cover just to age 14, at which stage the kids can stay home alone while the surviving parent works. This is a very personal decision.
The graph below shows the forecast cover levels for a family, both parents aged 40, with a $300,000 mortgage. They’ve decided they want $10,000 for a funeral and $30,000 a year for 10 years to replace the loss of one income. This gives them a total of $610,000 of life cover.
Each year that they age, their mortgage cover should be reducing and their dependency cover should be reducing by $30,000. The graph shows the difference between my reduction model and the standard inflation-increase. The gap between the two lines is where a lot of money is wasted on premiums.
Part of my review process is that we agree what the planned reduction will be. It is up to me to initiate that process because your life is too busy to worry about this.
Want to set up a reduction plan? Call me now.