Thank you for the fantastic response to the series of articles that we have been publishing to make life insurance simpler to understand. In the recent articles, I tried to demystify the insurance products and compare Participating Endowment Plans with Whole Life Plans and Investment Linked Plans. Having dealt with them, I thought it might be a good idea to take a step back and answer a simple yet important question — “How much life cover should I buy?”
In this article, I will answer the key question with the help of a series of simple yet fundamental questions. Once the question about the amount of cover is answered, the next steps would be to choose the appropriate plan. This is where previous articles on comparison of plans could come in handy. But for now, let’s focus on answering the more fundamental questions!
· Do I need life insurance? The life insurance cover is essentially a safety net for those financially dependent on you especially partner, children or parents. You don’t need life insurance if you have built sufficient wealth to create a safety net of your own and self-insure yourself. In all the scenarios, it makes sense to buy a life cover.
· How much cover do I need? The sad reality is most of us are under-insured. However, the good news is that it is easy to calculate the appropriate cover. The life cover should roughly be equal to expenses the family would incur during their lifetime. This needs to be then adjusted to reflect the existing debt and savings. Let’s take the following example to understand it. All amounts are in SGD.
1. Future expenses of the family ^: 1,000,000
2. Existing debts: 500,000
3. Existing savings: 250,000
4. Approximate life cover (1 + 2–3): 1,250,000
^After accounting for regular expenses and education expense for children. The expenses (and hence the cover) need to be adjusted upwards to reflect medical expense if the appropriate medical covers are not bought.
· How long should the policy cover be? This depends on several factors and should continue till the time any one of the following holds good
- The children are financially dependent on you
- The mortgage is outstanding
- The savings are not sufficient to cover for the family expenses
· How frequently should I revisit my cover? Life rarely follows a plan. The needs of life and the life cover is therefore dynamic. For example, after buying life insurance, you purchased another home or experienced a windfall from the investments in cryptocurrencies. While the former would mean you need to revise the life cover upwards, the latter could mean you no longer need one! Given the rapid changes in the life, it might be a good idea to revisit the cover every six months or at least yearly.
With the belief that the article helped you answer the fundamental questions on deciding the life cover, I will sign off. But not until I have left you with a pro tip. While reviewing the life cover, if you come to a conclusion that you don’t need it, don’t surrender. Instead, sell it to fidentiaX. We would be happy to offer you a better deal!
Disclaimer: The article has been written with an aim to broadly explain an otherwise complicated and technical topic for readers with little or no insurance background. Hence, it doesn’t have finer details but is still broadly correct. Before taking out the insurance contract, the readers are advised to consult their respective financial advisers. The readers are also advised to consult the tax consults for any tax related queries they might have.
About the writer: Mr Sumit Ramani is the Chief Actuary of fidentiaX. He is a qualified Life actuary and a computer science engineer with over a decade of experience in (re)insurance business with focus on modelling of life and health products, peer review and business analysis.
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