By Finbar Garcia
LUTCF, FSS, MFA
September was Life Insurance Month worldwide, and in keeping with our commitment to educate the public about it, the Trinidad & Tobago Association of Insurance & Financial Advisors (TTAIFA), hosted a series of press and radio programmes. The following is one of the articles.
Many persons have at least one Life or Critical illness insurance policy, but is the value still sufficient for you or your family? Understanding the dynamics of having the correct amount of insurance is key to your financial survival and that of your loved ones.
There are many “rules of thumb” in calculating the amount of insurance a person should have. While some of these are standard industry practices, it all boils down to your individual needs and that of your family, of course keeping in mind the cost factor, as insurance premiums are payable for life or up to a pre-determined age according to the policy contract.
There are many variables that you need to consider while applying for insurance, some of these are: Affordability, Income Replacement, Expenses, Family Age Demographics, Family and Current Medical History, Occupation, just to name a few.
I will share with you some methods used for both life and critical illness policies. Let’s start with your life insurance.
Ten times your annual income: This is an old method. While it is still being used, it has since outgrown its effectiveness. Basically, you are telling your loved ones that the insurance proceeds will only last ten years, (see fig 1). If you have very young children, then this option may not cover your family needs beyond ten years, depriving them of future goals that you may have started due to your untimely passing.
Ten per cent of your monthly income: This method focuses on affordability ratios but limits you from investing more. Based on the type of policy offered to you, your coverage may be limited or even less than the first option. This method helps the underwriter with regards to a clients’ affordability: income to insurance expense and the possibility of having the client continue to pay. As your income increases you will need to increase your coverage (see fig 2).
Income Affordability Guide: This is a method used by all insurance companies with regards to income and age factors and coverage amounts allowed. The younger you are, the higher the factors; as you get older and now applying for insurance, the factors are lower, but hopefully your income is higher, so the coverage can then be determined based on the age factor you fall into (see fig 3).
Interest Rate Method: This is the safest method of all. However, affordability may be an issue based on the policy taken. By applying this method, the agent will determine a safe investment interest rate, usually the current fixed deposit rate at the time of applying. This method allows the client to have adequate life coverage, so in the event of their untimely passing, the insurance proceeds will then be invested in a Fixed Deposit at the same interest rate used for calculating the cover (see fig 4).
All four methods will carry different outcomes, but based on the information given to your agent and the desired financial security you want, then you will need to choose accordingly.
Now, let’s look at critical illness. When a person is diagnosed with a critical illness, what is foremost on their mind is the desire to live, and what will compound this situation is not having the finances needed to deal with all the medical expenses and still trying to maintain decent standard of living.
While there are public medical institutions that you can go to for treatment, this can be daunting, as you may be on a waiting list for an appointment, and every day that goes by, things can get worse.
All insurance companies offer a critical illness policy that has a comprehensive list of ailments covered, so let us calculate the amount of cover you need to have. Remember, your life policy will only pay upon your death, so having a critical illness policy is key to your financial and medical survival.
You need to understand that being diagnosed is the first step, then comes your monthly expenses, as these would not disappear. Based on your occupation, you might have to work reduced hours at reduced income or even stop working for an extended period, so where would your income be derived to meet your monthly expenses and the medical expenses that will be needed?
Good financial planning would take into consideration your monthly expenses for at least three years, (considered the recuperation period). It’s usually between 60-75 per cent of your gross income, which will allow you to meet your fixed monthly commitments.
Now, the medical expense part of your policy. Once your preference for treatment is to stay in Trinidad, then calculating the cost will be easier.
Medical expenses will vary depending on the critical illness, but you should have at least one million dollars coverage towards your medical expenses. Then add that to your general expenses needed during your three-year recuperation period. This will place you in a good financial position to battle both your medical condition and maintain your family’s standard of living (see fig 5).
Why deprive yourself and family of the dreams you have for them.
Speak with a financial advisor today to secure a better tomorrow.
Call me for more information on planning your financial future. Send your questions to firstname.lastname@example.org or call 620-1185.