Q&A - Answers to basic questions No. 18 to 21
18. Should children be insured?
For most families, there are probably many objectives much more important than getting insurance protection for a child. A child's death is very unlikely, and even when it happens, it's not financially horrible. There might be a need in a child's life for costly medical treatments or long term care as well, but - again - its probability is very low, especially compared to that of something bad happening to the parents (when it means not just extra cost but usually also a loss of income). However, there are some valid arguments supporting the idea of insuring children that people who have obtained the proper insurance portfolio for themselves, with large enough coverages, might consider:
19. I am very healthy. Do I still have to pay the regular premium price?
Health is valuable in financial terms too.
20. I have had health problems. Can I still buy insurance protection?
It is not always easy to tell in advance, whether someone can buy a certain insurance policy or not. There are some limiting or excluding guidelines or rules, but also there are flexibility (e.g., availability of protection but for a higher premium), dissimilarities among companies, and changes in the treatment of certain health facts compared to how they were treated several years ago.
The lesson is that if you really need and want insurance, do not give up on it too early. It doesn't cost you more than a little time and attention to invest, and that can result in a sensible decision-making situation. If you cannot get what you want, you may get it from somewhere else; and if you don't like a particular offer, you can refuse it without consequences.
21. How can one calculate the need for insurance?
Talking about basic life insurance, one way of calculating the amount needed by survivors is by trying to add up all the items in their future budget (this amount for shelter, that amount for food, clothing, transportation, etc.); the other is to set out from the amount being spent on the family's current lifestyle, and take a reasonable percentage of it. While the first one seems to be more accurate, it can also be cumbersome, and one can easily get lost in the details. The second method's strength is its simplicity that allows us to focus on the larger issue of time. The length of the period for which a certain annual / monthly amount is needed is crucial in determining the total capital need to be covered by the insurance benefit. With computer, it's quite easy to calculate this need for various time periods, with various assumptions on inflation and investment returns.
When life insurance is sought for estate planning purposes, estimating the future capital gains tax payable is usually the main issue. Indivisibility of certain assets can be also a factor when someone wants to treat heirs equally.
If insurance is bought mainly to create a tax-shelter, the investment side of the arrangement (how much money to invest, timing of the investment, intended capital / income level in x years, assumptions on returns), together with personal factors influencing the premium, determine the necessary size of insurance needed for this application.
Disability insurance is inherently limited to about two third of previous income (or frequently less, if we think of 'natural' increases in income over the years due to inflation and job progression / promotion), so the general rule is to try as much coverage as one can get.
Critical illness and long term care insurance have their respective ceilings. Probably no-one can be said to be over-insured with the maximums; however, the general rule applies: there is no exact method that would tell you how much insurance you must have. It's a choice everyone should finally make considering all the available resources, emotional things, and personal circumstances.
When insurance is bought for business purposes, it's less about emotions and affordability, and more about calculations, business assumptions, negotiation and contractual arrangements among partners, and perhaps even spouses and key employees. Considering all possible scenarios, and involvement of accountants and lawyers is quite indispensable in these cases. (Not because these other professionals could foretell the basic components of calculating the need for insurance, but because in calculating various scenarios and elaborating contractual arrangements they do have their role.) It is a good habit to revisit insurance arrangements from time to time for anyone (especially after important changes in one's life), but it's especially important when businesses are involved.
Top page (on personal financial planning)
Life and health insurance (including disability, critical illness, and long-term care protection)
If you are / have ...
These web pages are for information purposes only. The information contained and presented, while based on and obtained from sources we believe to be reliable, is not guaranteed either as to its accuracy or completeness. The content of these web pages is solely the work of the author, Laszlo Kramar.
The views (including any recommendations) expressed on these pages are those of the author alone, and they have not been approved by anybody. Neither the information nor any opinion expressed herein constitutes an offer, or an invitation to make an offer, to buy or sell any product discussed or referred to in these web sites. These web pages are for educational purposes only and are not intended for use by residents of the United Sates; nor are they intended as an offer or solicitation in any jurisdiction outside of Ontario, Canada. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
(c) Copyright 1997-2006 László Kramár. All Rights Reserved.