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The advice gap

The alternative title of this piece is 'What crowdfunding and insurance calculators have taught me about what a useful amount of life insurance is'.

Tuesday, February 16th 2016, 10:48AM

by Russell Hutchinson

You might think that the ‘advice gap’ is the difference between having no life insurance, and having the ‘ideal’ amount. This cannot be counted or even calculated with any accuracy.

While zero cover is a pretty reliable number, and is adopted by lots of people it is largely a product of ignorance or thoughtlessness. They may simply have never thought about insurance or had it suggested to them. You might be surprised, but I still come across people who have simply never been asked to buy some life or income protection insurance and have only a vague idea what it does.

On the other hand academics can argue forever about the “ideal” amount of cover forever. Some of them think it should be zero too, come to think of it. Far simpler to refer to some insurance company calculators and compare that with what I call afterthought insurance.

Take the ‘calculated amount’ first. I invented a case that is about typical for the mid-life buyer of insurance. This column is too small to elaborate the details but a representative insurer calculator reckons the ideal amount of cover was $1.3 million.

Now consider the ‘afterthought’ insurance. When you didn’t buy any cover, and then tragedy struck, the thing to do in the digital age is launch a ‘crowdfunding’ appeal. The great thing about these is that not only can strangers donate, but we can see the average that they raise to help the bereaved families. A US-based insurance adviser website looked at these and found they typically raised about $2000 (US).

So that is a measure of the advice gap. What someone can get on their own account, versus what a major insurer calculator thinks you need. $1.3 million sounds like a lot. So let’s describe it from a budget perspective. A 40 year old male allowing two dollars a day could buy $750,000 although the price climbs sharply due to age-related increases after that, sometimes so sharply that people cancel their cover and go without. So here’s another example to set alongside your $2000 from ‘afterthought’ insurance: at age 60 you can still buy $30,000 cover for a dollar a day. Imagine what 30,000 can do to ease the worries of your loved ones. Even just $30,000.

I think in almost all cases some cover is more useful than none.

Tags: Russell Hutchinson

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