Australian is living longer than ever. According to AIHW (Australia’s National Agency for Health and Welfare Statistic and Information), Australian are on the top board of live expectancy: 79 for man, 84 for woman.

But until the mystery of death is resolved by scientist, sooner or later we are all will meet the end of the road. That’s mean most of all will have our own funeral.

Of course, depending on who is the Funeral Director/Company, and all the glory details about the arrangement, the cost of funeral will vary from one to another starting from around $3000 to unlimited. For this article, let’s choose $6000 as reference cost – it will buy you a decent funeral service.

Yes, for most of us, $6000 is not little money that can easily just be splashed around, but it’s not actually too bad either.

Looking after this quite significant cost before it actually happen is one wise and smart decision.  Especially if that’s means our love one will not have to worry about the cost of your funeral. Well, the question for this article is whether a Funeral Insurance Plan provides you a good solution or not….

The quote

Here is the quote that I receive a few days ago (all in Australian dollar – date:April 2011) – for $6000 benefit this is the premium that you need to pay:

I am quite sure that’s probably not the cheapest one, but it give you a ball park figure as reference.

Value for money?

Say if you are 40 years old, the annual premium is about 3% ($177/$6000). Let us compare with life insurance. One of our policies is $40 monthly for $250,000 benefit. So, annually it is $480 or just under 0.2% of the benefit. So, for a start, this funeral insurance is roughly about 15 time more expensive than life insurance – it’s expensive insurance.

Let stop here temporarily and see what are there as alternatives:

1. Prepaid Insurance Plan

More and more funeral home are offering prepaid funeral plan. This is the one that you actually go to the local funeral home and discussing what you want to be done on your funeral and they give you the cost that you can prepaid it. It is good if you have just extra cash to pay for it, but even not, they usually have installment plan for you to pay for several years.

Let see… if $6000 cost is spread into 3 years, then the cost that you need to get is $2000 a year -or- $38 per week.

2. Save for it !

Sooner or later....

But how much? With $3.41 a week or $177 a year, you would need 34 years to come up with the $6000. Let’s try to do it in 5 years instead: $6000 / 5 = $1200 a year or $100 a month – if this is too hard do it for 10 years.

Whatever the money you want to commit,since you will put it on saving account that has interest, then we should not be worry with inflation figure. Here is alittle bit fancy way to do it:

1. Open no-account-fee saving account that provide cheque facility. This account is just for this purpose only nothing else.
2. Pay committed money into this account every month (internet banking or auto debet from your main account)
3. In several years, you will reach the amount… but don’t stop there – keep doing it to provide buffer for inflation cost and better service plus something else.
4. Every birthday, write a cheque for your next of kin to the amount that is available on that account already – but don’t give it to him/her. Put it on your “emergency only” folder (you should have one). This is to make sure that if it happen you die on that year, your next of kin can immediately access the money to cover your funeral cost.Every year, tear up the last year’s cheque and write a new one. Not only to update the amount that now available, but also to make sure  the bank will still honor the cheque without many problem as the cheque is fresh (less than 1 year old).
   Do not put this cheque to your lawyer/trustee with your will as it may require too much paperwork before anybody can touch it.
   Alternatively, you can ask your trusted friend / neighbor to hold it and only give it to your next of kin only when you passed away.

The only challenge that you meet on this way is your own discipline. How discipline are you putting some amount of money for it? But it’s really flexible. Even if your time come before it reach the full amount, your saving is still helping your next of kin nevertheless,

So?

Only by taking insurance you will not pay the whole amount that you will need. However, taking insurance means you are betting that the company will still be there up and running business when you need it (this is also true with prepaid plan).

The value of having insurance is getting multiplied if you take the “family plan” – just check the term and conditions to avoid false expectation.

If cash flow is tight and you don’t want to add anymore burden to your bill, try the saving method. It will give you a little project every month and year until it reaches your target.

This insurance is not really essential, but it’s good to have.

So, as always,  decide what best for you and be responsible about it. It’s your life, it’s your decision and your own responsibility. Hopefully the article above can give you a food for thought. As for me, I will shop around for the best funeral insurance – as it gives value for your money – even though it’s expensive insurance..

Hope this helps….

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The Level Premium Pricing

I hope I can easily explain the concept using simplified graph below:

Level Premium Pricing

So, in this Level Premium Pricing, you will pay the same amount of premium each time. It will not go up , it will not go down. So, say you purchased a $50,000 life insurance policy where you pay $20 a month. Then you will be paying $20 a month all the time until you terminate the policy.

As pictured, the benefit (the money that will be paid by the insurance company) is also stay the same. If you die – God forbid – say next year, they will pay you $50k. If you die 20 years from now, they still pay you $50k.

As you suspected, our “frenemy”, inflation, will have much of the say here. Because of inflation, the value of money will be diminished over time. In practical sense, nowadays for example, you can live for a year with $50k…. But how about 20 years later? Yes, it’s hard to imagine. You can do it the other way around: ask your grand father or grand mother how much is the annual living cost 20 years ago, and you will see how little that amount of money can buy in the current year.

So, as pictured, the value of the money becoming les and less every year although you still pay the same amount – thanks to inflation.

Advantages

• Easier to budget, as the premium will not changed

Disadvantages

• The amount of money that you will received may not worth much on the future day. Imagine you have a payout of $5000 insurance for your living cost today – it will not give you much further isn’t it ?

The Stepped Premium Pricing

Stepped Premium Pricing

In this pricing, the premium that you pay will go up every year. But at the same time, the benefit also go up every year. The result is that the value of money that you expect to received when you claim will be approximately maintain at the same level.

For example: if we assumed the inflation is steady at 3%, you will need $70,000 rather than $50,000 for a year of living cost in the next 12 year. So in this case, although the dollar value has increased from $50k to $70k, but the value is maintain at the same level (to cover cost of living for 1 year)

Advantages

• The value of the premium will be maintained (approximately) – so if we can live for 1 year without work with $50k, 20 years in the future, with bigger number of money, say $70,000 for example, it will roughly still good for 1 year living cost.

Disadvantages

• Although we know the benefit will be increased to combat inflation, the premium can actually increase more than that. Say the inflation is 3%, so next year $50000 benefit become $51,500  but you need to pay $22 starting next year ($2/$20 =10% increase). Why? Of course because the insurance company want to make more profit of you. Read this insurance bungle if you want to see actual story.

Conclusion

Although both pricing seems make sense on each own, but since the purpose of the insurance is to cover your pitfall at certain level (enable to cover x number of years living cost, to buy the replacement car, to reimbursed the cost, etc), then this level need to be maintained. If you choose the level pricing and it happen you become very under insure then the function of a insurance is no longer be fulfilled.

So, the clear cut is there: Always choose the stepped insurance premium pricing. Yes, it will go up every year, but so does the benefit – so you will maintain the value. Hopefully with more and more competitor in the market, any insurance company will not be able to price gouge its customer easily as the customer can simply jump to other company.

Take care !

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Homeloan/Mortgage and Other Debt

Let start with our debt. The biggest debt that we are involved with, is homeloan / mortgage. The loan itself is long term loan, usually 25 years or 30 years, and the amount is gigantic, several hundreds thousands dollar maybe.

Additionally, we will have many kind of other debt: a personal loan, business loan, car loan, and the most common one: credit card debt. These loans usually have shorter term and the total money borrowed usually less than $100,000.

So, think about them this way. Whose money are these hundreds thousands of dollar money (or more) that we owe? Well, in a nutshell it is bank’s money. Or probably in more general-technically-(more) correct term: all of those money belong to a financial institution (backed by bank or private lender). Yes, those money can be made out of nothing, but this is another matter. Technically, all those money are our liability, but they are assets in the book of these financial institutions.

Let Them Payback Their Own Money

The Bank's Money - Our Debt Money

Now the question is: how about if there is a way to make these banks or financial institutions pay off our debt. Won’t it be a very sweet revenge for you ? Of course !

Surprisingly, it’s not that difficult. It will cost us a bit of money, but the end result is exactly what we want above. How we do it ? By taking insurance.

By taking insurance, in particular life insurance and income protection insurance, as long as you are not underinsured, if something happened to you (sick, accident, death, etc) and you no longer able to produce income, the insurance will pay your cover and in turn you can use that money to pay off all the debt you left behind.

“OK, but it’s not the bank’s money, it’s from the insurance” you might protest. Let us see this. These big insurance companies (Deal only with the big one as you want to make sure they are still around when you need them the most)  are usually public listed company and its share/stock are traded in the stock exchange. Who own these stock/share? If you study them carefully, the majority of the shareholder/stockholder of these giant insurance company will be financial institution: investment banks,  managed fund, hedge fund, and another financial institution. So, the insurance money is their money as well (direct or indirectly)

Furthermore, when you study about money, you will understand that only bank can ‘create’ debt money out of nothing. So the banks is really in the middle of these money business.

In other words, these banks lent you money, you took insurance, and when you could not pay it (sick, die, terminally ill, etc), they will pay our debt (a.k.a their ery own money). Isn’t that sweet ?

Yes, it’s not free. You need to pay the premium of the insurance on regular basis but the benefit outweigh the cost. Imagine that you have $500,000 life insurance whose premium is $50 a month. These $50 per month, even you accumulate it for 30 years with 10% interest, it’s very small compare to the potential payout. Not to mention the peace of mind factor that really very invaluable and worth much more than $500,000. It’s good to remember that usually the insurance will not pay any money if the claim is due to your own fault (e.g: suicide, fired by employer, etc)

Although this strategy can be applied to any debt that you have, but you will find that taking a debt for business/investment will work the best.

How The Rich Did It and You Can Too

When it comes to borrow money to invest (business or other investment), they will choose (and you can too) to take “Interest Only” loan. It’s interest only, so the principal will never ever paid. If you borrow $300,000 for your investment house, taking “interest only” loan, 30 years later, the debt will still be $300,000 not a cent less. By using this way, there are some advantages:

• After 30 years, the value of $300,000 will be much less because of inflation. In other words inflation becomes their friend.
• They have certain asset protection as the asset (investment house or stock or anything else) is mortgaged to the lender, so technically they don’t own the asset, although they have total control the asset. If they don’t own the asset, then somebody else cannot really sue them for that asset, isn’t it ? That’s why the rich loves debt. They control not own.
• The interest paid to serve the loan is usually ‘cost of business’, hence, tax deductible.
• The extra money that they would pay if they took “principal and interest” are invested to make them even richer.

Conclusion

The main point of this article is NOT about “no need to pay your debt”. The most important point is that when you do business/investment, taking debt (even a large one) is one big alternative. By taking proper insurance, you don’t even have to worry about the debt in case somnething happen to you, just use it to make you more money.

So, as final words:

• If you have debt, especially homeloan/mortgage, it’s only logical for you to take insurance. Life insurance and Income Protection insurance to be specific. Read further info here: Protect Your Financial Life: Insure Yourself, Income Protection: Your Salary Cover In Need
• Consider taking “interest only” loan when doing business to take advantage of its potential. Have a sweet revenge! But read this beforehand: Be Careful With “Interest Only” Loan: a Potential Problem You Should Know

And as always, please remember, do not take debt to finance your lifestyle or for consumption (read more) . Only take debt for money making activity (business and investment) – read more.

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Insurance Comes To The Rescue

Luckily, the answer of this problem is really simple:buy life insurance. To be exact, a life insurance that also cover disability and trauma cover. We will never know ever, when we are going to be sick or die. Jokingly said, yes, if you die, it’s no longer your problem but it become your love ones’ big burden. But how about if you ‘just’ become disable or need constant (expensive) treatment, not only you will suffer from your medical condition, you will feel the financial suffering as well.

Protect Your Family With Life Insurance

Imagine for one second what will happen if the primary provider of your family suddenly cannot provide that support any more. Not long, your home under mortgage will be seized by the bank as repayment can no longer be made. Then your family will need to rent out. Your surviving partner may need to take multiple jobs to keep the children at the best school  chosen before. Maybe, they don’t even have extra money to cover your funeral and have to fall into further debt that they cannot afford to pay. Well, you don’t want all of these happen to them, don’t you?

The cost of the insurance is relatively very small with the benefit. Think like it’s the price for your peace of mind. So, life insurance premium is something that you need to add to your budget.

Do Not Under Insure

Insurance is one of those things that you buy but you wish you don’t need to use it. So, when you do need to use it, the worst that could happen is that you under insure. The sum of your life insurance should at least covers:

• All mortgage / homeloan, personal loan and credit card debt (Total the maximum limit, not the current usage).
• Living cost for 6 months for your family based on current budget.
• Sum 2 item above, then add 20% for administrative cost and the unexpected (funeral cost, hiring lawyer / conveyancer, etc)

For example: say you have $300k mortgage, $30k car loan, $20k credit card limit ==> Total $350k. Your household budget is $2500 per month ==> 6 month=$15k. Then you need to take a life insurance that pays ($350k+15k)x120%=$438k. (You may round this up to $450k)

So, the idea is when something happen to you, your family/ spouse can immediately pay off all mortgage / debt / credit card and continue to live at least 6 months without you without financial burden. The hope is during that 6 months, your family/spouse can adjust whatever needed to continue/improve their lifestyle now that at least they are debt free.

On the other side of the coin, you don’t want to have the pay out become too big as you will need to pay higher for the premium monthly/yearly.

Where You Get One ?

I would suggest to always get the free and friendly service of insurance broker. Not only they can compare various insurance provider to get the cheapest cost/premium, but also they can help to make the claim, should you needed to claim one, faster. Yes, they will get residual commission as long as you still hold the insurance, but just like homeloan, you will pay this commission money regardless. (It’s not cheaper to go direct to the company, the person who serve you will get the commission anyway, and you did get to compare the market)

Another factor to consider is that the insurance company need to be good enough and to stay around in the market when you need it later. This is quite hard to judge so your insurance broker might have better idea. Remember: get at least quote from 2 different insurance brokers

What To Do Next ?

Go find an insurance broker, make appointment to review your situation and  get a quote for your insurance above. Then review your budget to make sure you can afford it. If the budget is too tight, you need to find something to slash to incorporate this very important item.  Remember, if you have a debt, you have to have an insurance.

(Before that, maybe you want to read about another important , but optional, protection for your income: “Income Protection: Your Cover In Need“)

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