You are probably under-insured…

How do you estimate your income replacement needs? Do you multiply your annual income by a factor ranging from 10 to 15?

The traditional method is too simple as it doesn’t take into consideration your dependants’ living expenses, future educations and your current financial status. If you are the sole breadwinner, you might prefer to have more life insurance coverage. The extent of coverage you require also depends on how many dependants you have and how old they are. For example, you may not need as much coverage if your children are older and your spouse is working.

To begin, you can compile a list of the risks or events that concern you and assess the likelihood of the event happening as well as the potential financial loss that you or your dependants might face. Next, refer to the link below for the content shared by DIYinsurance for a more comprehensive approach for calculating how much Life Insurance you need.

Do you look forward to a claim when you buy insurance?

Whenever I travel, I would cover myself with travel insurance. Just because I am covered with travel insurance, do I actually hope to lose my baggage, miss my flight connection, fall ill or meet with an accident? I definitely do not. I still remember my fateful experience of losing my wallet while I was holidaying in Hawaii. Was it an anti-climax to the holiday? I was certainly thankful that I received my loss back through an insurance claim.

Life insurance serves as a way to compensate for a loss. If the item we lose is an object like a luggage or house, it can be easily quantified into dollar terms. But what if death occurs, how do you quantify the loss of your life? How much life insurance do you and your family really need?

Simplistic rule-of-thumb
In the past, financial advisers used a simple method to estimate death needs. It is quick and easy:
Multiply your annual income with a factor ranging from 10 to 15.

Example: If you earn $40,000 a year and a factor of 10 is used, you probably need around $400,000 of death benefits. ($40,000 x 10 = $400,000)

But this is too simplistic to determine your needs isn’t it? It does not consider critical considerations such as your dependants’ (eg. your spouse, children, your parents) living expenses, future obligations and your current financial resources when you are no longer around to provide for them. A more comprehensive approach is preferred now.

Life Insurance Computation

Finding out how much death benefit you require is simple. You just need to determine two things – your financial obligation to your dependants and your available resources now. You can use this Life Insurance Calculator to guide you.

Your Financial Obligation
What are your financial obligations if death occurs now? Consider these areas in determining your financial obligations.

a) How much do your dependants need for their living expenses?
If you have no dependants who depend on your income, e.g. single with wealthy parents, then there is no need for you to provide for this area. But if you have dependents, you would need to estimate how much monthly allowance you have to provide for them and for how long.

Example
You are currently contributing $2,000 monthly to your family’s expenses and you estimate that you will continue contributing for another 25 years, until your children start working, or the life expectancy of your parents.

You need = $2,000/month x 12 months x 25 years = $600,000 life insurance sum assured

b) Do you need to provide for your child’s university education?

The cost of university education is expensive. How much you need depends on the number of children you are supporting and their field of study (medicine or non-medicine course).

 

Non-medicine study (4 years education)

Medicine study (5 years education)

Tuition fees

$38,800
(9,700 yearly x 4 yrs)

$115,000
(23,000 yearly x 5 yrs)

Living expenses

$49,600
(12,400 yearly x 4 yrs)

$62,000
(12,400 yearly x 5 yrs)

Total Cost

$88,400

$177,000

Example
You want to provide university education for 2 kids, one for medicine and the other for non-medicine course.

You need = $88,400 + $177,000 = $265,400 life insurance sum assured

c) Any loans to pay off

People generally do not wish to pass on their debts to their dependants. Consider any outstanding loans you are still servicing:

  • Home loan
  • Car loan
  • Others – eg. personal loan, credit card

d) Any lump sum gift to beneficiaries
Some people wish to be able to give a lump sum to their loved ones (eg. grandparents, nieces/nephews) or even to charitable organisation (eg. church, SPCA).Once completed, you just tally up the above (a + b + c + d) to determine how much death benefits you require.

Example
Total Life Insurance Sum required = $600,000 + $265,400 = $865,400

Your Available Resources
After determining your insurance needs, it is necessary to find out what resources you already have to meet this need. Essentially, if you need $1,000,000 to provide for your beneficiaries and you have more resources than that, then you do not need to buy any more life insurance (death benefits). You only need to purchase if there is a shortfall.Your available resources can be found in 2 main sources.

e) Your existing insurance coverage
How much coverage you have in:

  • Your own policies – eg. Dependant Protection Scheme (DPS), policies bought from agents
  • Your company insurance (employee benefits)

f) Your current assets
Usually in the form of:

  • Bank deposits
  • Investments – eg. shares, property, unit trusts
  • CPF – total of Ordinary, Special and Medisave accounts

Sign up for PolicyPal iOS or android. Upload your existing insurance policies, we will show you whether you have a shortfall or an surplus in your life insurance needs.

If there is a shortfall, you can close the gap to provide for your dependents in the event of your unfortunate demise. You can easily request for a quotation from various insurance companies from us.

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PolicyPal

PolicyPal is here to help you make informed and savvy financial decisions through the good times and the bad.

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