As you are shopping around for insurance quotes and insurance companies, these are a few basic factors you need to consider before you make any decision.
1. HOW MUCH LIFE INSURANCE COVER DO YOU NEED?
Here is a quick guide if you are not doing this with a financial planning professional yet. For ease of calculation and explanation, we are not taking time value of money and inflation into consideration.
Take into account any financial obligation that needs to be paid off if premature death or unfortunate event such as total & permanent disability or critical illness should occur. Examples could be business or personal loans or debts to be repaid or mortgage loan repayments.
Is there anybody who is dependent on you for financial support? Maybe aged parents, spouse or children? If there is, you may want to plan for the financial support to continue should any unfortunate event happen. For example, you may be planning to provide for your aged parents or a young kid for the next 20 years with an annual sum of $20,000. You would need a sum assured of $400,000 should that sum of money be needed right now.
Is there a lump sum of money you would like to provide if an unfortunate event should happen? Is there someone you would like to leave a financial gift for when you are not around anymore? Or maybe a charitable cause you would like to contribute to? If there is, be sure to take this into consideration in your calculation of how much insurance cover to buy.
Replacement of Income
This is the tricky one where you will read of many differing opinions. The reason why this question is not so straightforward to answer is that guesswork of your income growth rate is involved.
There are general (very general) rules of thumb for this though.
You need to know how many years you would like your income to be replaced for. For example, if you would like your income replacement to be for 10 years. You will need a $500,000 sum assured if you are earning $50,000 currently. That will enable you to withdraw $50,000 per year for 10 years.
Alternatively, some may suggest for you to have insurance cover of 20 times your annual income. If you have a cover of 20 times your annual income, an investment return of 5% from your insurance proceeds will be able to replace your current income perpetually.
2. HOW LONG DO YOU NEED THE INSURANCE COVER FOR?
Knowing how long you need the protection of insurance for will play a part in knowing what types of life insurance products may be suitable. Do you need the insurance cover for a specific number of years only such as for a specific loan payment period or do you prefer the insurance protection for the whole of your life?
3. WHAT IS YOUR BUDGET FOR INSURANCE PREMIUMS?
Knowing how much sum assured and how long you need the coverage for is one thing but your ability to pay the insurance premiums also need to be considered. For example, if you require a specific sum assured but your budget is limited, you may need to buy a term life insurance policy to get the required insurance cover even if you may prefer an insurance policy that can accumulate cash values.
4. WHAT TYPES OF INSURANCE POLICIES SHOULD YOU BUY?
There are different life insurance products to suit different financial needs and wants. Find one that is suitable for yours. There are mainly four types of life insurance products.
For protection needs with no accumulation of cash value
Mainly for protection needs with accumulation of cash value
Mainly for savings needs with accumulation of cash value
Accumulation of cash value through investments. Whether it is for protection or investment needs depends on the specific policy.
The pointers listed above is catered to the Singapore market. They are meant for general information and discussion. It is not intended to provide any insurance or financial advice and you should always seek advice from a qualified adviser if in doubt.
Benjamin Ang has a Bachelor of Business Administration and holds the designation of Associate Financial Consultant (AFC) and Associate Estate Planning Practitioner (AEPP). He writes about wealth matters to share financial knowledge with the public and also writes regularly on living and experiencing all the wonderful things that life has to offer.
Find out more about him at http://www.benjamin-ang.com/