Zeroing in on best life insurance plan

Q: When considering my overall financial plan, I want to know how much life insurance I need. What are the factors that should be taken into consideration, and how is it calculated?

A: Life insurance is the cornerstone of any financial planning or risk management process. The role of life insurance is to ensure that there are sufficient funds to achieve your hopes, dreams and ambitions for your family in the event of premature death.

In a risk management approach, one would seek to protect his or her most valuable assets. By classification, your earning power is your most valuable asset, and so should be protected to be maintained.

In determining how much life insurance is needed, three rhetorical questions should be asked: Where are you now? If you had died yesterday what would you like to happen to your family?

Think about those for a minute. The answers you really need are as follows: what are the steps you have taken so far to protect your family in the event of premature death, what would be the financial shortfalls if you had died yesterday, and what extra amounts of life insurance do you need to purchase. There are two types of needs to be considered: immediate cash needs and income needs.

Immediate cash needs covers such thing as final expenses, (expenses associated with burial, repatriation, doctor bills and hospital fees), an emergency fund, college education funds, and sufficient capital to cover debts and liabilities.

These immediate cash needs must be there in the event of premature death otherwise dire consequences may befall the survivors.

Income needs require a different calculation as it is dependent on amounts and periods where the income is needed. The periods under consideration may reflect required income until your children reach the age of 18, or until your spouse reaches retirement age. Income needs would be converted to capital amounts that can provide the income; alternatively you could opt for protection that gives a regular income stream and takes the stress out of having to invest capital in the appropriate investment vehicle.

Once you've reached a conclusion on the level of cover and income you require, you will need to take into account other financial factors that may lead to a revised figure, such as your spouse's income and your savings or any other resource that can reduce overall shortage such as social security, life insurance, retirement fund or so forth.

Most financial advisors can help you establish your life insurance and protection need. The product recommendation will also take into account the client's financial position, so offering the best product for the budget available.

There are a variety of products available and the premium is rarely the way to compare product against product. I would recommend you take professional advice before taking any final decisions.

There are people who tell me that life insurance is too expensive and they can't afford it. My worry is that if the client cannot afford to pay for the insurance premium now, how do they expect their family to cope without their entire income?

- The writer is an expert consultant at Nexus, a leading financial advisor in the Middle East.

The opinions expressed above are the writer's and don't necessarily represent views of Gulf News. Readers are encouraged to thoroughly investigate all investment decisions. Please send your questions to advice@gulfnews.com.