Thursday, February 13, 2014

Insurance Mythbusters: "My sum assured need only cover my debt".

It's that time again! Time to bust (or confirm) some more myths!

When it comes time to set the sum assured (definition here) for their insurance policy, be it life cover, trauma or Total Permanent Disablement, people without advice tend to assume that as long as the sum assured covers their debt (mortgage, credit cards, car payments, medical expenses etc.) then that's enough.

For instance, someone with $200,000 left to pay on their mortgage and $20,000 left to pay on their car may decide that they only need to be insured for $220,000. After all, being insured for more means higher monthly premiums and why take on the extra cost for something that isn't necessary?

Except in most cases, it is necessary.

Make sure your insurance sum assured is calculated properly, with the aid of a qualified adviser or broker., not with the aid of an abacus!

A $220,000 debt most of the time will not be covered by a $220,000 payment, as there are other factors and expenses to consider. Legal fees, interest costs, the cost of a financial adviser, bank fees and taxes and more all may need to be taken into account. So to make sure you don't leave any debt behind to your beneficiaries, it is generally necessary for your sum assured to cover the sum total of your debt and then some. How much will depend on your unique circumstances, but if you're in doubt, ask a professional.

VERDICT: This one is definitely busted. Just calculating your sum assured to erase debt may leave more costs on yourself or your beneficiaries during stressful times when they can't afford it. Make sure that all potential costs are considered, taken into account, and if at all possible, leave yourself with room to play by expanding your sum assured as much as is possible and affordable.

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