MONIE Orchards - Personal Financial Planning
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MONIE Orchards - Personal Financial Planning
Using the Building Blocks to Answer the Essential Questions

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What if I die too soon?

Life Insurance Basics
This topic varies from country to country, but the basic idea is that you take out an insurance policy, and if you die, your beneficiaries get the amount of the policy, also called the face value of the policy..
For me, the primary purpose of life insurance, is to replace your earning capability should you die, or become disabled. So the face value of the policy should provide enough capital so that once invested, your income is replaced. (See also the sections on frail care, unemployment.)
Therefore, once your
retirement savings
⁠
is large enough, these policies can be discontinued, and the premiums put to better use elsewhere.
There are basically two variations:
Full life
A full life policy stays in place until you die, so your family "always gets something out". However, these policies are more expensive, and you might just outlive all your beneficiaries. See also the comments on
inflation
⁠
below.
Term-life
Term-life insurance stays in place for a specific period, or until a certain age is reached. These policies are generally cheaper.
I prefer these, and it should work in conjunction with your
retirement savings
⁠
. Life insurance is basically there to replace your income to your dependents. However, once you have saved enough to be able to replace your income, then review your policies, as you no longer need them, and can use the money they cost you better elsewhere.
Other considerations and possibilities.
The following considerations should also be taken into account, and they might contradict each other. How you apply them will depend on a holistic view of your circumstances. Work through them with your financial advisor.
Declining balance life insurance
This is not used often, but can be used, to cover the outstanding amount on a loan. For example, some mortgage lenders will request you to take a policy on your life to cover your mortgage. For this there is also an option to purchase a policy where the value declines over time to match the outstanding balance on the mortgage.
Inflation
Inflation can be devastating to your investments. When you take out life insurance, ensure that it has an inflation escalation clause, especially if you live in a country that has an inflation problem. If you cannot get an escalation clause, ensure that when you decide how much insurance to buy, that you take inflation into account.
Affordability and changing requirements
Do not try to spend more on life insurance than what you can afford. These policies are expensive to cancel. In any case, you need to review your life insurance policies regularly, and especially after life changing events - marriage, births, deaths. (Not your own).
Many policies provide some kind of mechanism where once you have purchased the policy, you can increase the face value of the policy later. If money is scarce, which it usually is, then this is a way to at least get started.
Tax treatment
This is completely country specific, but make sure that death taxes for your estate is considered when you purchase life insurance. It is no use you have purchased wonderful policies for your family and other dependents, and then it all goes to pay taxes. You need to consider assets of all kinds in this discussion.
And once you get into the levels of wealth where estate duties becomes an issue, you must definitely also involve tax experts, if you have not done so already.
Other risks covered
Some insurance companies also offer other benefits, some of them good, others ignorable.
Additional accident cover - Ignorable
Just because you die more gruesome than usual, does not mean that your family needs more money to replace your income.
Terminal disease, Dread disease - Very good
These policy additions vary from country to country, and also from company to company. But the basic idea is that if you are diagnosed with a terminal disease, the policy will pay out immediately, and not only once you have died.
This allows you to ensure that the funds are properly invested, and your family taken care of before you die.
Investment policies - So-so
Some policies allow one to increase the premium, so that a portion is set aside for investment. I prefer to use life insurance policies to provide life insurance, and investment vehicles to provide investments.
Other applications
Some charity organisations will take your monthly contribution, and use that to purchase a life policy with them as the beneficiary.

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