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Life insurance - planning how much to buy

When we’re growing up, we get dragged round while our parents do the shopping. Inevitably, we pick up some of their habits or find ourselves completely rejecting others. Having seen them take hours to buy just one thing, we can find ourselves buying the first thing we see. Or, having seen our parents wailing when they got home with the first thing they bought, we now walk from shop to shop comparing prices and quizzing all the sales staff about the supposed quality. No matter what baggage we carry from our childhood, there’s one big rule everyone should follow. The more expensive the goods or services you propose to buy, the greater the care you should take. No one should buy the first car they see at the first showroom they enter unless it’s the one-of-a-kind you know you will never find anywhere else. That goes double for buying a house. The realtor may be all over you to buy within minutes of seeing the property from the outside but, this is likely to be the single biggest purchase you make in your life. You owe it to yourself to make the best decision you can.

Insurance is a fund you are probably going to pay into for at least twenty-years. Some people buy a policy in their late teens and pay until they are sixty-five. By any standards, the premium payments can mount up to a big chunk of change so, when you’re making those first decisions, you should take your time and get the best advice available. Let’s start with a statement of the obvious. No one lives forever, so this is all about planning how much you want to make available to those you leave behind. From the insurer’s point of view, the calculation is relatively simple. It takes your minimum cash benefits, divides it by the number of yours you are expected to live, and adds a small profit margin. Why a small profit margin? Because the insurer will sit on a growing cash fund for many years and collect investment returns, only a part of which are passed on to you as the cash value.

You’ve probably noticed people are living longer these days. More people are expecting to live into their nineties than ever before. This changes the nature of the calculation because, to be honest, no one knows what the world will look like in sixty or seventy years time. You could reasonably decide to be selfish and look for a policy with an annuity option. That way, if you die in the next ten or twenty years, your family will be protected. But if you’re running short of cash in fifty years time, you can convert the policy into an annuity and supplement your pension. By then, all your grandchildren should be grown up. They can look after themselves.

Life insurance is all about making intelligent guesses about the amount needed by those you leave behind. The hardest blow would fall on your family if you pass on before the children have finished their education. It’s also easier to estimate how much to leave to provide for their needs. After that, life insurance becomes more speculative, particularly because of the effect of inflation. What sounds a lot of money now may be small change in fifty years time.

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