One of the best ways people protect their family's financial independence is through Life Insurance.
Basically, life insurance replaces the income you didn't have the chance to earn, by living and working and compensates your family for lost opportunities because you passed away early or unexpectedly.
If you're like most modern families, we've probably got some big and exciting plans for the future. But why should those plans be put at risk or not happen, just in case you're not there.
With a life insurance policy, if you're terminally ill, or pass away unexpectedly, your family or whoever you nominate can feel safe that the amount you've chosen, perhaps hundreds of thousands of dollars maybe even millions, will be there for them to help cushion their loss almost immediately and usually tax-free.
So how much is enough? There's no exact answer but more insurance gives you more protection. It also depends on what you can afford so you may need to prioritize.
It's often a trade-off between what you'd ideally like and what you can afford.
Ultimately it's a question that only a financial advisor can answer with clear-cut detail, but until you have that conversation with the financial advisor, here's a suggestion on how to start your thinking about that tricky question, 'How much is enough?''
Over the years we found that most people want pretty much the same things for their family, and when we've asked, 'How much is enough?' they usually have the same four wishes.
We call them The Big Four Things, (you'll probably call them common sense).
So here they are:
- One: Have enough to pay out all your debt
- Two: Have enough to replace the lifetime value of your income
- Three: Have enough to provide a nice place to live
- Four: Have enough to leave a legacy so your big plans for your family still happen even if you're not there to share them.
Let's see how the big four things approach worked in real life.
Meet George. He's a logistics coordinator who spends most of his work time chasing boxes deadlines and freight companies. His partner is the love of his life (and drives him crazy at times). George has a stepdaughter who he adores and a well-earned reputation as a bit of a weekend DIY tragic relentlessly renovating his townhouse.
George's shift work is often unpredictable, so living closer to work and cafes makes his life easier. He's on his second significant relationship and is determined to make sure this one is the best one.
His superannuation balance took a hit from a past family law settlement, so George realizes that from now on he'll have to work a little longer, and a bit smarter to make up for lost time and resources.
So today, George is getting his life insurance sorted. He wants to do his part to protect and provide for his partner and his family and safeguard their long-term financial independence.
Let's look at how George approached the 'How much is enough?' question for his family.
- First, he added up all his current debts (and added five percent for inflation just to be sure). Along with the home loan it came to around five hundred and twenty-five thousand dollars ($520,000).
- Next, he calculated the value of his income until retirement. With at least a good 25 income earning years ahead of him, on a wage of eighty-three thousand dollars ($83,000) a year over the next 25 years he could like to earn at least 2 million and seventy five thousand dollars ($2,075,000). That figure actually shocked him, because it never stopped to consider the huge value of his income earning potential.
- Finally, he did a quick budget for their big future plans. George had him always wanted to celebrate his 50th birthday on board a luxury cruise ship and later spend some time traveling around Europe, so he could better appreciate his partner's cultural history. When George retires he's determined to be an active super granddad to his future grandkids, a tormentor to his partner's in-laws and maybe spend six months or so volunteering his logistics management skills overseas, with the Red Cross. He's always trying to give back and make a difference in the world. He figured that the budget for the big future plans should be about two hundred thousand dollars ($200,000).
Altogether, George added up the value of his big for things to be around two million seven hundred thousand dollars ($2,700,000).
Yep, that's a lot of cash, but then again life is meant for the living, and you only get one chance at it, and that's why George worked so hard.
So he decided, that was the level of life insurance he and his budget were comfortable with.
Sure, the closer to retirement he gets and the more he earns, the more likely he'll adjust that number down as he needs. But until then if something terrible happens and George passes away unexpectedly, now he feels finally relieved and happy, (and kind of proud) that his plans to live a bigger life with his new family will continue, even if he's gone.
For George, having his life insurance in place it's about being able to keep your promises and honor the commitments you make, even if you're no longer there.
Now whether you think life insurance is a financial decision or an emotional decision (or perhaps a bit of both) we understand that it's ultimately about love, the future, and reality.
We like to say it's about keeping good growing.
Do you want to know more about how to calculate how much is enough for your situation just ask us to introduce you to one of our specialty financial advisors, who understands the needs of diverse families - whether logical or biological, and the financial and emotional choices that we all need to make to live a bigger life.
Until then, 'what's the cost of your big four things?'