Insuring for the Unthinkable

Boyo and I are currently in the process of updating our life insurance.

We've had term life cover for about seven years now, and realised recently that we are probably  under-covered for our current circumstances.  These being:  we have a preschooler, we have no house of our own, and it turns out that the insurance we thought we had with some super policies don't apply to us!

So we've been looking at increasing it.

Not a bright idea for a time like this, you might think.  I would probably have to agree.  On the surface it doesn't necessarily make sense.  I've known friends to cancel things like life or car insurance when income has dropped.  And having found out this week that our income has significantly dropped from what we anticipated (by significantly, I mean to the point we are wondering how on earth we can possibly cull and/or find the needed funds to survive another year of study!), you might think we would be culling back our life insurance rather than increasing it.  And it is tempting to do that.  After all, the likelihood is that we'll never need it anyway, right?  Well, I personally am pretty cautious about making claims like that.  I've had too many friends not have third party car insurance, and then have an expensive accident and had to pay large amounts of money for damage done to the other car...and it took years to pay off.  I'm too much of a planner and thinker (okay, and worrier) to just decide that it's not a problem we'll ever face.  I know that the last thing I want to be worrying about if something should ever happen to Boyo is how to pay the bills.

But the next big question is, how much is enough?  And does that depend on what you earn, who earns it, who will be left needing to use?

Here's how we worked it out:

We currently live on around $800NZ in the hand a week (less really as we have less income for the twelve weeks of summer, but anyway, $800 is a good figure).
It is unlikely we'd be earning more than that should one of us pass away unexpectedly in the next few years.  In either career, we'll be starting in that wage bracket, when we do start earning full-time again (have to graduate first!).

We took that amount, $40,000 over a  year, and multipled it by three.  $120,000.  That's to give the remaining partner up to three years of living expenses.  Enough time to finish qualifying, have Munchkin at school age, and time to make some big decisions. 

Then we added $180,000 to that towards a house purchase.  We wanted to do enough to purchase a house outright.  In our area that's around $280,000 to $350,000 for a basic house.  That's a bit more than we can afford the premiums for at present.  So we compromised.  $180,000 as a deposit would mean a mortgage that can be managed on $40,000 a year.  Payments around $250 a week.  We wanted to know that it wouldn't be significantly more than our current rent, as we know we can manage to pay that on the kind of income we'd probably be earning.

$300,000 cover on each of our lives.

We chose to have the cover the same for both of us because regardless of whether it is a primary income earner or a stay-at-home mum who is gone, when you have young children they'd really need their other parent around a lot, particularly during the first year.  So if something happens to me, I want to know that Boyo could stop work to look after Munchkin.  I'd hate to think he'd have to go into daycare or something because Boyo was struggling to pay the bills as a suddenly single parent.

The cost?  We're insured with Fidelity Life, a good quality Kiwi insurance company.  Their premiums will be $45.22 a month for term life cover (that means we don't get a lump sum at the end of the term, but it keeps the premiums really low).  I can live with that.  I hope we never, ever, ever have to use it, but I still feel so much better knowing it's there, just in case.

The other thing with insurance, wills, and stuff like that is that you need to reassess it frequently.  Boyo and I have agreed that we would reassess our life insurance if we move to another area.  The amount we currently have might work okay here in Tauranga, but in Auckland we'd need more to own a house.  We'll also look at it again once Munchkin is at school, or once we own a house. 

We also looked at the option of having life insurance on Munchkin.  My parents did for me, mostly to pay for burial costs should the unthinkable happen.  But Fidelity Life doesn't offer it until kids are ten.


Now to finalise the paperwork.

Do you have life insurance?  How did you decide how much to insure for?  If you don't and you have a young family, do it now.  It's important.  Don't leave them hanging, love them through your planning.

Amy