Cut the cost of insuring your life

Cut the cost of insuring your life
24 August 2010

DO YOU worry about your family in the long-run? Or wonder what will happen to them if you are no longer able to provide? Do you want to accumulate wealth for the next generation?

Here’s a little secret that savvy wealth preservers know: insure your life. And leave the money for your children, grandchildren or a charity of your choice.

If you are the main breadwinner and you have a young family, then taking out life insurance should probably be your number one priority, even before paying off debts. However, if you aren't the main breadwinner and your family would survive without your income, then paying off debt should be your first priority.

If you are starting out as a young family and you have limited resources, you can find affordable life insurance to protect your offspring from creditors in case you die or become incapacitated.

Buy when young

Purchase a policy while you’re still young and healthy so you can qualify for a low premium. The longer you wait, the more expensive your premium will be, although, clearly, the earlier you start paying premiums, the longer you will pay them for provided you don’t suffer an untimely death.

The birth of your first child is a good time to start shopping for a policy. Should anything happen to you, your child will at least grow up without inheriting your debt, and could even have some financial security to see him or her through higher education.

Picking the right policy

So, how should you go about choosing the right policy? First, decide how much you want to insure. Start with the amount of debt your currently have – your mortgage, car loan, student loan and so on. If you have any credit card debt, try to pay it all off before you purchasing life insurance, if possible.

If you have a $100,000 mortgage, then make sure you purchase a policy for at least $150,000. This ensures your family can pay off the mortgage and have a little cushion for unexpected expenses and fees.

If your children are small and you are saving up for their higher education, factor that into your insurance policy, too. Tuition per year per child at a private college can run well above $10,000 these days. In ten years’ time, when your child is ready to enrol, tuition will be even higher, so factor inflation into the face value of the policy you purchase.

Know what's available

There are different types of life insurance, and what is available to you depends on which country you live in. In Lebanon, for example, a healthy young adult can pay $1,000 per year for an insurance policy of $500,000. If they are still alive at age 70, they collect their policy’s face value. If they die before then, their family receives the money.

In Syria, this option is not available. However, a healthy 30-year-old man can purchase a policy for $500,000 for about $200 per year. There is a catch, though. If this man is still alive at age 70, the policy expires and he receives nothing. And, of course, he will be unable to insure his life at that age.

Nevertheless, this type of policy is still very convenient and cheap if you have debts, like a mortgage or car loans, and you want to protect your family from creditors in case you become incapacitated or die.

If you want a more sophisticated product, then shop for whole-of-life insurance (as opposed to term life, which is what we have been talking about). Perhaps some of the best products are available in the US.

Say you are a healthy 30-year-old, and you want to insure your life and put $20,000 per year into investments, to grow them tax-free. The way it works is this: you pay $20,000 into your policy every year. Part of this sum goes to cover your life insurance premium, which for this example is around $1,200 annually for a $1 million policy.

The money grows with the going interest rates, tax deferred every year, which is as good as tax free. If you need the money, you can take out a loan at low interest against the cash value you have already accumulated. Or you can leave the money alone and let it grow.

Some insurance policies pay out the $1m policy plus the cash value in it at the time of death, which is not a bad way to accumulate wealth over generations.

Pic credit: Michelle Meiklejohn/ FreeDigitalPhotos.net

Have you insured your life or do you have other financial priorities? Share with cashy below...

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