Don’t You Keep Ledgers Man?

This question was put to a colleague of Alison’s in the 1990’s during her time in the banking branches. A gentleman customer querying a transaction was told the computers were ‘down’ and so his question could not be answered, triggering this aghast outburst. It should be noted the word ‘ledgers’ was projected in the style of Lady Bracknell’s “A handbag?”, as portrayed by Edith Evans in the 1952 film version of ‘The Importance of Being Earnest’.

I’m sure bank customers had harsher words during last Sundays breakdown of computers at Lloyds & TSB. Some mileage was made of this by Dave Fishwick, founder of Burnley Savings & Loans, a man who is proud of his ledgers. They do use a computer, but he was pleased to remind us they also use a hand-written record book of all transactions, which is kept in the safe overnight. To be fair, as successful and lovely as Burnley Savings & Loans is, or “Bank on Dave” as it is styled, I suspect he would have to employ a fair few scribes to record all the customer transactions of a retail clearing bank.

Life Matters

I have had a couple of enquiries about life insurance* this week. (*Being picky, this would be assurance if we’re talking about whole life cover.) Anyway, both enquiries were not whether to have it or not, but how much is needed. Unlike homes or cars which can be repaired or replaced and values are easily assessed, how much is your life worth? Well to be abrupt, it is not what it is worth to you, but what it is worth to those you may leave behind, and the really annoying thing is we know with 100% certainty it will happen, just not when.

I will not attempt to produce an essay on the different types of life insurance / assurance policies but I would hope I can encourage you to do some sums and consider the results.

The primary objective is to ensure those you leave behind are not financially disadvantaged. So, if you’re young, debt free and single, you probably do not necessarily need life insurance, but be advised that when you think you do need it you will be older (cover more expensive) and it might not available or only at higher cost if you have suffered ill health in the meantime. For some couples with similar earnings, it might simply be to settle debts, most commonplace being a mortgage.

Method 1. The Multiple

Multiply your annual income by 10 and add an amount to cover the funeral, the after party and any debts. This is a pretty blunt tool and does not take adequate account of childrens needs either now or after they enter adulthood. It might be too much if you are older, and it might not be enough if you are younger, and no thought is given to spouses income or perhaps pension benefits.

Method 2. The Shortfall

Work out the income your household will need to replace in your absence from today until your retirement age. Add on for funeral and debts etc., then deduct that which is in place in the form of savings or other assets, as well as ongoing income such as death in service pension or spouse’s income. Whilst this is better than the multiple approach it falls down by ignoring inflation or investment returns. It also creates a ‘static’ figure which might be enough now, but too much in say 15 years time if you have survived and reduced the mortgage and increased savings or pensions benefits.

Method 3: Income Generation

This a little more complex but perhaps the most reliable in terms of taking into account more factors. Add up debts, funeral etc plus an amount for immediate bereavement costs, less existing savings. Calculate the annual income needed whilst there are children and how much this will reduce by once the children are financially independent (about their age 35). Of course in some families a child may never become independent because of their health or a disability. These figures are then plotted for each year from now until the spouse’s age 100 alongside other sources of income. Inflation is applied, investment returns considered, and then after doing lots of sums we can work out what the need is now, and illustrate how the need will change over time. Financial events such as a child’s wedding can also be factored in. This process is repeated for the spouse. I use a computer spreadsheet to do this but it can be done with a pencil & paper, fingers & toes or abacus but it will take some time. At this point you can then consider which policy or combination of policies gives you the right cover and peace of mind.

So that is your homework; do the sums above and have a bash at the questions below. What better way to spend the weekend.