Monday, April 9, 2018

Money Friendship Month - Chapter 2

We are talking about a better relationship with our money this month. And we cannot express good feelings towards our money without protecting it from the unexpected. Illness and accidents can put a dent in our finances, therefore we need protection in place to take care of our loved ones and to provide for the family, so the life style can be maintained. And that protection is covered through life insurance. 

Even though life insurance is an uncomfortable topic for many people, and it may scare some visitors away from today's post, I will ask that you power through the next lines, as you learn some information that will help you build your relationship with money on a friendly level. I will cover some basic points regarding life insurance, with a promise not to bore you by the use of jargon.

There are multiple types of life insurance available, and mainly they fit in 2 categories: term and whole life. The term lasts for a number of years (usually 10, 20 or 30 years), while the whole life lasts until age 100 or 120 – depending of the company and the product selected.

Most people believe they lose the protection at the end of the term; in fact, most of the term life insurance is guaranteed renewable and convertible. It sounds more complicated than it is. It means that you can re-new the coverage at the end of the term without answering medical questions again. It can also be converted into a whole life policy anytime during the term, or just before expiration – also without answering medical questions a second time.

There are 2 ways to figure out the amount of protection necessary: the expenses the family needs to cover when someone dies, and the value of the in-come the person would have earned had they lived. 

The first method is more popular, and the one most frequently used by financial professionals with their clients. The best known way of calculating the need for coverage is the DIME method. It stands for Debt (how much debt the family has to pay off), Income (how much money would have been earned until the youngest child turns 18), Mortgage (balance on the mortgage for the family home) and Education (cost for college for all children).

The second way is by multiplying the annual income by the years left to earn it. One other popular way is to use the children's ages and the number of years until they can provide for themselves. In this case, please keep in mind that your children will probably not be able to provide for 100% of their financial needs at age 18, or even at 21-22 immediately out of college.

My intention in writing this post was not to frighten you or to make dire predictions. I simply wish for you to put the protection in place that will provide peace of mind for yourself and your family, so the unexpected doesn't hurt you, your family or your life style. And if this post raises more questions for you, please don't hesitate to reach out; I'm always willing to answer questions and provide the guidance you need.

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