Sizing the cover can go wrong in two ways. The more common is too little: there's a policy, there's a monthly premium, there's a sense of security - except that if something happens, it turns out the cover is a fraction of the real need. The rarer, but also costly, mistake is too much: the family pays for years for protection it doesn't need. Both are avoidable - with calculation.
- Under-insurance is the more dangerous: a false sense of security that collapses at the worst possible moment.
- Over-insurance burdens the family budget - the unnecessary premium takes resources away from other goals.
- The right amount isn't a feeling, it's the result of a calculation - and one that needs refreshing every year.
Too little: how does it happen?
- Sizing from the premium: "this is what we can spend on it monthly" - and the amount is whatever that works out to. The right order is the reverse: the need first, then optimizing the premium by obtaining competing offers.
- Going stale: an amount that was right ten years ago is too little today - prices have risen, so have expenses, and perhaps the family too: indexation and inflation.
- Loan-only thinking: the cover protects the debt, not the family's everyday life: the second layer.
Too much: when does it happen?
Typically when sizing is driven by fear or the lure of round numbers, or when life circumstances have changed - the loan is paid off, the children are independent - but the amount stayed the same. The unnecessary premium has an opportunity cost: the same money would work harder in an emergency fund or toward a retirement goal. The solution isn't canceling the policy, but adjusting the amount: review.
The balance formula
The right amount is the need calculated with the mortgage + bills + plans method, minus existing reserves and cover. Neither anxiety nor thriftiness should override that - only the numbers can. And since the numbers change every year, the right amount isn't a fixed state but a maintained balance - its price is fifteen minutes a year.
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