Another important factor is not to reduce our search to the local market. There are very good international insurance options with very competitive premiums and different levels of sophistication. Therefore we must always advise ourselves properly to make the right decision at all times.
When should I take out my life insurance?
Some people think that life insurance should take it when they are older, or that they must have dependents to just hire it. The truth is that life insurance is designed to cover our human capital during our professional life. That is, in the retirement or retirement stage it is NOT necessary to maintain life insurance, since from that moment it will be our financial capital (investment plan) responsible for generating the necessary income.
We must bear in mind that at an older age, the probability of death will be higher, so the cost of insurance will also be higher. To give you an idea, for every five years that we pass up, the cost of insurance increases on average 50%. Therefore, the best time to make sure is now!
For what amount should we take out life insurance?
It is common to see people who buy life insurance for 50 or 100 thousand dollars without any previous analysis. Even cost is sometimes the most important attribute for your decision. This way of thinking is not correct, especially for someone who takes the administration of their assets seriously. A simple method to know the amount to hire the insurance is as follows.
- Determine the amount of annual spending your family faces
- Subtract the amount that is covered by a third person, for example, your wife or your husband. The balance is the annual flow of funds that you must cover
- Assume a conservative return rate and divide the previous amount by that rate. The result is the objective amount of our coverage.
For example, if the annual expenses we want to cover are USD 45 thousand and we expect a conservative return of 6% per year, the amount of insurance to be contracted will be: US $ 45,000 / 6% = USD 750,000.
That is, if the insurance is activated, the amount to be received will NOT be used to directly cover our expenses, but we will invest it so that the annual income generated (for example, 6%) allows us to cover our expenses. This methodology prevents our assets from becoming extinct over time and additionally helps consolidate our assets in the retirement stage.
How much can life insurance cost?
Life insurance is not expensive when analyzed correctly. Let’s look at the example of a term international life insurance for one million dollars (person who requires USD 60,000 annually assuming a return of 6%). For a 35-year-old person who seeks to cover his human capital until his retirement (65 years), the annual premium will be around $ 3,000.
In the case of universal insurance, the premium triples (for the savings component). If the coverage were only USD 250 thousand, the annual premium would be a quarter. As you will see, they are not very high figures, considering the amount of insurance.