Life Assurance – How Much Is Enough?
Well I’ve never heard anyone complain that their spouse had too much life assurance after they died. But how much is the right amount is a common question. There are many formulas and opinions as to how much is the correct amount. However most agree on the following basics…
Make sure you have enough to repay all of your debts, mortgage, credit cards, car loans, burial and/or costs of repatriating your body (some suggest this could be as much as US$20,000). Some debt will have life assurance built in so you should check with your lender to see if this is the case. You should ensure that the amount of life assurance not only matches the amount but also the term of the loan and currency.
Once a policy is in place the life assurance company cannot cancel it provided you continue to pay the premiums. However if you take a policy out to cover a 10 year loan but your life insurance policy is only for 5 years, you may find that the life insurance company refuses to insure you for the last 5 years of the loan if your health deteriorates for example.
Currency is also very important. Always try and make sure the life insurance is in the same currency as the loan. This is to avoid exchange rate risk, where the exchange rate moves against you leaving you with insufficient cover for the loan.
If you have a young family, make sure there is enough to provide for them until they have at least finished education. You may also want to set aside a specific policy for this purpose as university education can be especially expensive. Don’t forget to allow for inflation in this calculation.
When calculating the amount of life assurance you need, your existing life assurance and assets need to be considered as this should help reduce the amount recommended and thus save you money, so don’t be shy about telling your adviser about your assets as well as your liabilities – it could save you money.
Needs of Your Spouse
Will your spouse remain in Dubai in the event of your death? Or will they return to your home country where they might have a strong family network to support them? Would they want to take a less time consuming job or become a fulltime parent so that they can spend as much time as possible with the kids? The answers to these questions and more will determine what level of life insurance you require.
There are some tax planning uses for life assurance, particularly for those with assets in UK and UK Domiciled individuals. So the reason for the life assurance can also be a determining factor in deciding how much is needed.
One thing is certain: regularly reviewing your level of life insurance as your circumstances change is important. Times when your life assurance requirements should be reviewed are: getting married; buying a house using a mortgage loan; becoming a parent; changing job; receiving an inheritance or other capital sum for example.
Once you have protected your current situation you are ready to think about the future and to start saving. Other areas I will cover in future blogs will be critical illness or dread disease cover and income protection, which are two important insurance products that anyone who has dependents or wants to be self sufficient should consider.