A while ago, I posted about the insurance in your pension, discussing how much insurance you’re already paying for, and therefore do not need to purchase. In this post I plan to review the common misconceptions that people have about insurance and what is and is not necessary to buy in addition to the insurance in your pension:
Life insurance: Before I even discuss how much life insurance you need, one thing must be made clear. Life insurance allows the insured to take care of his dependents in the case of his or her demise: no dependents no need for life insurance. If you have no children, parent, spouse, sibling etc. that would suffer financially in the event of your death, there is no need for insurance. If you set up your pension correctly, you should have your spouse getting 60% of your salary and each child getting 20% until age 21 or 18. You only need to purchase additional life insurance if this will not be enough. Similarly, if you do not make a full time salary (for example, a housewife), then you would need to get life insurance. I want to stress this, because most people think the opposite is true. If Dad makes the bucks and Mom stays at home with the kids – Dad doesn’t need additional life insurance but Mom does.
When you buy life insurance, you usually buy a set amount (ie 500,000) that the beneficiaries will receive upon death. The best way to decide how much you need it to purchase insurance for the amount of money you’re going to need for 10 years. For example, let’s say a housewife allows the kids not to be in tzaharon (saving 2,000 a month) and watches the kids while the husband is at work and prepares dinner (another 5,000 a month). This means that you’d need 7,000 x 12 x 10 = 840,000 to replace her in the event of death. I obviously oversimplified this, but as a general rule, writing out the cash flow you would need will help you determine how much you need to buy.
If a spouse works part time or only pays in a pension from some of his salary, then insurance should be bought to cover the rest. For example, let’s say I make 10,000 but only pay a pension on 6,000 (the rest is a bonus that I get every month). Or let’s say I only work a 60% job and earn 6,000. Either way, I’d need to get additional insurance for 4,000 x 12 x 10 = 600,000.
Disability: Your insurance can cover up to 75% of your salary, which is probably enough to get by. Like life insurance, your pension should cover this if you set it up right, and like life insurance, it is the stay at home spouse who will need an arrangement made to cover her in the case of disability. When setting this up in your pension it is called nechut (נכות). When purchasing it on your own it is called ovdan kosher avodah (it is also called that if you have bituach menhalim). Usually, this insurance only kicks in after three months, so you should still have three months expenses put away in case something happens.
In my next post I’ll cover probably the most important insurance you don’t have, seudi, and the much less useful that too many Israelis are sold, teunot ishiyot.