One method that can be used is called the "human life value" approach. This is calculated as the present value of the family's share of the deceased breadwinner's future earnings. It is calculated as follows:
a) Estimate the individual's average annual earnings over his or her productive lifetime
b) Deduct taxes, insurance premiums and the cost of self-maintenance; the remainder is used to support the family
c) Determine the number of years from the present age to the retirement age
d) Use a reasonable discount rate the determine the present value
For example:
present age: 30
retirement age 65
annual earnings $50,000
self maintenance: $20,000
support family: $30,000
present value for 35 years at 4% discount: 19.41
amount to insurance needed: $582,000
This is slightly more than 10 years. For such a large sum, it is necessary to buy decreasing term insurance.
If the period is taken as 25 years (i.e. the children would have grown up), the factor is 16.24. The amount of insurance needed is $487,000. This is close to my rule of thumb of 10 years.
Tuesday, December 1, 2009
Policy loan
Most life insurance policies allow you to take a loan against the cash value of your policy. You have to pay an interest rate, which is usually 6% to 8% per annum.
The savings in your policy earn a yield of around 2%. You are therefore paying an additional interest of 4% to use your own money. This is a bad deal.
To give a fair deal to its policyholders, the insurance company has to reduce the interest rate on policy loan or give a higher yield on the savings. A fair spread should be 2%. You can find out if the insurance company is treating you fairly by asking about this spread.
The savings in your policy earn a yield of around 2%. You are therefore paying an additional interest of 4% to use your own money. This is a bad deal.
To give a fair deal to its policyholders, the insurance company has to reduce the interest rate on policy loan or give a higher yield on the savings. A fair spread should be 2%. You can find out if the insurance company is treating you fairly by asking about this spread.
Optimism in Banda Aceh
My friend in Aceh told me the following:
a) Banda Aceh had a population of 250,000 before tsunami. Today, the population had increased to 400,000. More people came during the reconstruction. Some are likely to stay over the longer term.
b) The city is buzzing at night. The traffic is quite busy, although not as congested as large cities around the world.
c) Aceh is now peaceful, with the end of the insurgency and independence movement. The Governor of Aceh is a local person.
a) Banda Aceh had a population of 250,000 before tsunami. Today, the population had increased to 400,000. More people came during the reconstruction. Some are likely to stay over the longer term.
b) The city is buzzing at night. The traffic is quite busy, although not as congested as large cities around the world.
c) Aceh is now peaceful, with the end of the insurgency and independence movement. The Governor of Aceh is a local person.
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