Debt-Free Forever by Gail Vaz-Oxlade (the beginning after the end read novel .TXT) 📕

cost can be low if you buy it young (when the risk of death is low), or very high if taken late in life. If term insurance is rent, then permanent insurance is a mortgage payment; in the early years there isn’t a lot of asset accumulation, but over the long term the pot will grow.

Most whole life policies have a “reserve,” which can be refunded if you cancel the policy before your death. This reserve is referred to as the cash value of the plan. You can also borrow against this cash value at an interest rate set in the policy. However, if you haven’t paid it back, the money owed will be deducted from the death benefit.

As we saw in an earlier example, term insurance premiums are much lower than those for permanent insurance, so if you need a whack of coverage and just don’t have the cash flow to support permanent insurance premiums, you may have to default to term insurance to protect your family in the short-and medium-term.

HOW MUCH INSURANCE SHOULD YOU BUY?

There is a reasonably simple formula for figuring out how much insurance you should buy. Yes, it’s more math. Yes, you’ll need a calculator. Here goes:

Your Insurance Needs = (B + C + D + E) - A

A: Your family’s Assets and income, including existing insurance, a spouse’s income, government benefits, pension income, income from investments (e.g., GICs, CSBs, mutual funds), income that could be realized from the sale of assets.

B: Your family’s monthly Budget needs, including shelter, food, and household supplies, clothing, utilities, car maintenance, insurance (home and car), child care, entertainment. If you have a young family, many more years of expenses have to be covered. With a family that’s almost launched into independence, less insurance may be needed.

C: Costs associated with your death, including funeral expenses, accounting and legal fees, probate costs, estate taxes.

D: Debts to be paid off, including credit card balances, mortgages, loans, and lines of credit.

E: Exceptional expenses, including educational costs, vacations, major purchases (e.g., new car, medical equipment), and the like.

Begin by calculating the income your family would have based on the existing income (from pension, spouse’s employment, etc.). Add the income generated from existing assets. Once you know how much income your family will have, you must calculate the expenses they will face.

Some expenses will be one-time costs, such as your funeral or the payoff of existing debt; others are ongoing, such as monthly expenses and educational costs.

The difference between what your family has and what it will need must be covered in some way if you wish to minimize the financial impact of your death. And that’s how much insurance you’ll need to buy. Good insurance representatives will take you through this process, and may even have software to make the whole thing easier. It’s important that you deal with someone who knows what they’re doing. Insurance is a highly technical financial product, and having someone on your side who knows the ins and outs is one way to ease the whole process.

WHAT KIND OF INSURANCE SHOULD YOU BUY?

The best place to start is with the amount of coverage you need. Let’s say you’ll need $125,000 to pay off your mortgage, $5,000 to cover your funeral expenses, $15,000 to cover legal and accounting bills, and an additional $100,000 to cover the capital gains your estate will be hit with. All told, you’ll need about $245,000. Buying a policy with a lower payout clearly won’t serve your needs.

The next thing to look at is how long you’ll need the coverage. Some of your needs may be short-term. Declining term insurance is often the most cost-effective way to cover mortgage debt. On the other hand, the need to meet your funeral expenses and minimize the tax hit on your estate is permanent and will likely go up over time. So permanent insurance will be your best bet here.

GAIL’S TIPS

Buying term insurance to cover your mortgage debt is a much better idea than purchasing the mortgage Life insurance sold through most Lending institutions. With mortgage Life insurance, the Lender is the recipient of the benefits and so it is the Lender who is protected. With your own term insurance, you get to use the money any way you need to, and if you’ve paid down a considerable amount on your mortgage, the remaining amount from the term policy can be used to meet your family’s other needs.

Since the premium on permanent insurance will remain the same over the life of the policy, while the premium on term insurance will rise each time the policy is renewed, the cost of term insurance will appear far less expensive in the early years of a policy. If you’re holding your policy for a long time—30 years or more—compare the lifetime cost of both types of policies (remember to compare similar features and benefits—apples and apples), and then make your decision.

Some policies let you buy the right to convert your term policy to a whole life policy at a later date. So if you decide to start off with term insurance to protect your young family and then decide to convert to a whole life policy when your needs change and you have more money, your health won’t be a factor in setting the premiums. However, your age will be and the older you are the more your insurance will cost.

Shop around when looking for life insurance. Get several quotes, make sure you’re comparing apples with apples, and buy the policy that best meets your needs. Resist the urge to overbuy, but don’t sell yourself and your family short either. Evaluate your future earning potential and your family’s ongoing needs realistically, take inflation into account, and then buy enough insurance to meet your needs.

DISABILITY INSURANCE

Here’s an exercise I like to do with the people who come to see me speak. Think about four of your friends who are all about the same age as you.