The truth is, you don't need life insurance. However, your dependence might need it! So, purchasing life insurance (especially when it's bought for the right reason) for your dependence, be it your parents, spouse or children(s), is a very generous and thougtful act.
In this post, i'll focus on the insurance Needs rather than What type of Policy, which i've posted about it here.
First, do you have any loans that you're responsible for? For example, if you're single and have housing loans, car loans, and credit card loans, you might not need to have any insurance to cover it, since you don't have any dependant. However, if you have spouse or children or parents who depends on the house or car, then you might want to insure that loan amount.
- How much is the outstanding loan balance that you're liable for currently?
Next is the current needs of you dependants. Is there anybody rely on you for their financial needs? If yes, then ask yourself these questions below for each group of dependants.
- How much do they need from you every year (excluding loan installments, since it's covered in a lump sum above) ?
A good start is the amount you give them currently. - How many years do they need from you?
If your dependant is your parents or your spouse, a good guide is to provide them for their entire life (age 85 and above). - What is their investment rate of return, conservatively estimated?
Note that it's "their" investment return, not "yours", since insurance company paid a lump sum (generally), and they will invest the money when you're no longer around. If they currently put most of their money in FD, then use the current FD rate.
Besides providing for current needs (as above), our dependant might have a future need too. For example, our children(s) might need a lump sum for their tertiary education. If you have any future needs, then do answer the below questions for each "future needs".
- What is the purpose of the future needs ?
Examples are like Education fund, Purchase/ upgrade home, World tour for your loved ones. For education fund, seperate each child's education fund. - When do your dependant needs it?
For education fund, they would need it usually at age 18. - When you're no longer around, what would your next-of-kin's investment return?
Warren Buffett's return might be high, but when he calculates his life insurance needs, he can't use his compounded return, since i doubt his wife would be able to earn his high rate of return from investments.
With these information, your total needs can then be calculated.
Then, calculate how much is your Net Worth (excluding your home, and your car).
The difference between your total needs and your Net Worth is your shortfall, which should be covered by insurance.
If your insurance is not enough, read this post to buy the right kind of policy. I'm personally insured for RM 1 Million, payable upon Life or 36 Critical Illnesses and paying a premium of not more than RM 200 monthly, at my current age of 29.
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10 comments:
hi, can I know which insurance company that you insured because for the same amount that I have paid, I was only insured for 100K ++ ? Thanks!
The insurance company isn't important. You can get it from Pru, AIA, GE, or any major company.
Most important is to get the "right" type of policy, and properly structured it.
My policy is investment-linked policy, with minimum premium (and thus, the charges i pay is minimum too), and the regular premium is sustainable for only 30 years (thus, my policy fee @ charges is kept at minimum).
Doing this way, it's like i'm paying Cost of Insurance only.
Ask your agent for how much is the "Cost of Insurance" for RM 100k coverage payable upon Life or 36 Critical Illnesses. You'll be surprised how cheap it is!.
Next is just structuring your policy so that you pay minimum fees + the "Cost of Insurance" which is your coverage cost.
View http://peterlim80.blogspot.com/2008/11/whole-life-or-buy-term-life-and-invest.html for reason why you shouldn't leave cash value with the insurance company.
Hope it helps.
thanks for your reply!
I understand term insurance can be much more cheaper than investment link insurance. However when I request my agent to restructure my existing investment link insurance, he say it is impossible to restructure it, best also it would be like changing another policy - charges will be high in first few years. The way I ask him is like ' I would like to increase the protection amount and reduce the investment part in my policy, can?' Anything wrong with my question which he might not able to get it? Or how should I rephrase it so that he can understand? Insurance policy is from GE.
can I know why do you opt for investment link policy? What's the different if you opt for the same amount of protection with the same amount payment for term loan?
I've another term insurance from Prudential that I just bought recently, 100k for 36 critical illness 15 years about RM600 per year. By comparing, would my term loan similar to the investment policy that you have bought?
oh.. my agent say the reason no able to restructure my investment link insurance is because the plan is no longer in the market which I bought few years ago.
When i asked my GE friend, he said it is possible to increase coverage while reducing your investments portion. Thus, your premium would remain the same.
Probably you can let me know your sum assured, other benefits, premium as well as the plan's name. Then we can analyze to see whether it's possible to increase to coverage further or not.
It seems that your agent is not telling the truth (though i can't 100% verify because i'm not GE agent). However, here's my observation:
1. Investment-linked policy is famous for its flexibility. Thus, when he said "impossible to restructure it" is very fishy.
2. "charges would be high" is crap!. I'll write about ILP vs term in another post, so that everyone can understand it better.
3. My GE friend say that there is no ILP plan that is "discontinued" as of his knowledge (just asked him a few days ago).
4. I'm an AIA agent myself, and AIA ILP can restructure, and none of AIA's ILP is "discontinued".
So, next you might wonder, what's the benefit of the agent not telling the whole truth?
Let's see:
- The agent's commission is tied to the Premium, and NOT Coverage. So, when you increase your Coverage while maintaining the Premium, what do the agent gets? Zilch!.
- On top of that, if your coverage is high, you're required to do Medical Exam, and it doesn't look good if the agent ask u to do it yourself, and submit to GE yourself.
- If he helps you to do it, it gives him more work, with NO compensation.
So, most agents would rather ask their customers to buy a new policy (and thus paying "NEW" premium, which means COMMISSION to the agents, but sadly... FEES to the customers).
Regarding why i ILP instead of term, i'll write in another post. Stay tuned!.
I will try to get the full insurance product info from my agent.
Looking forwards to your new post.
p/s: can you recommend your GE friend that understand about this to me?
I'm from Penang, and most of my (insurance) friends are from Penang.
Thus, it might better for you to find an agent who is from the same state as you so that he can serve you better.
It's not that the agent earns nothing. It just means they're earning less.
Good post. Actually , like most people i am surprised that you can be insured to RM 1 Million!! Just for RM200 per month. I am paying more than that and my coverage is not high!!!
Hi Peter,
I am in the midst of getting an life insurance + investment link policy from AIA as well. The sum insured is RM500k but monthly premiums is RM320.
I don't understand how you manage to get yourself insured for RM1 million and pay only RM200.
Please share with me.
Hi,
In an investment-linked policy, there's basically 2 fees:
1. Policy Fee
- This one is paid for the agency cost distribution. Generally, commissions for agents, leaders, trips, etc etc.
2. Insurance Cost (some insurance companies calls it Cost of Insurance).
- This is the cost for your protection.
Ask your agent for a breakdown of your yearly cost of insurance for your age, together with the breakdown for the critical illness, etc etc. It is shown on page 6 of the illustration page.
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