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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