What sort of Life Insurance do you have?

Back from my so-called vacation. Sadly, my Dad passed away right before I left so I spent most of my with funeral arrangements and sorting through his finances. A few important things I noticed. While my Dad was a very well-respected & apparently very well-known doctor with legendary medical knowledge, his financial knowledge wasn’t very good.

He had a little bit of money in CDs and bonds and a large chunk of money in savings. He also had a pitiful amount “invested” in life insurance. Life insurance is not an investment vehicle. Its used to manage risk. For a nominal sum you insure against unforeseen accidents and ensure the ones left behind are well taken care of. You do not use it as an investement.

Dad had whole life insurance where he paid rather large monthly amounts for a 20 year period. At the end of the 20 year period, you supposedly get your money back with a dividend[probably about 3-6% per year] In the invent you die after the 20 year period, your heirs get the same original amount. Unfortunately, Dad died a few years short of the original 20 year term. So we get only the original value of the insurance. Sadly after over 15 years, inflation has eroded the value of the policy so significantly that its worthless to us. It was effectively about 7 months of his annual salary from his flourishing private practice. If instead he had spent the same amount of premiums on term life insurance, he would have been insured for probably 5-10 times his annual salary. Luckily my mom & I can do without any support from insurance.

The amount of money he [& my mom] saved from a lifetime of work as doctors was also rather unimpressive. Both my parents used to save quite a lot from their salaries, but they did not do enough to invest it. And high inflation eroded most of their savings. A few good investments and they would have had a lot more to show for it. Of course he did much better than the average person in India, but their return on savings was probably 2% under the inflation rate for the past 20 years. So while they started earning more and more, their money didn’t work for them.

Another interesting point is that he worked right uptil the day he died. No doubt he was at the peak of his career[or maybe not even at his peak] but he worked 6 and a half days a week with less than 3 weeks vacation per year. While there is some nobility to his profession and he did a lot of charity work, I realy don’t think that excessive workload is good for you. Hopefully we can learn that life is to be enjoyed with your family and friends and not spent working until the day you die.

If you have minor kids or a stay-at-home spouse who you don’t think can maintain your lifestyle in the event you die, you should get insurance thats atleast 5 times your annual salary. Remember, its for the ones you leave behind. Its not an investment you make for yourself. If you have minor kids, you should insure your spouse as well, even if he or she does not work. Minor kids need full-time care and you’ll need to pay for that in case something happens.

Getting disability insurance is also a good thing to consider, although its more expensive that life insurance. However it’ll pay out a lot more in the case your permanant disabled. Thats the insurance you get for yourself!

And start investing today. Don’t wait to put off your investments claiming you don’t have time or money. The truth is few people start out with both, but with a little sacrifice and effort you can start on your path to financial freedom.

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