Whole Life Insurance
Asked on 19 Jun 2020
I bought my 1st whole life policy at age 21. Subsequently my friend introduced term policy which make sense at age 25 since the whole life policy insured amount is only 80K which is inadequate. The whole life policy will serve as legacy planning tool. At age 30, i was offered a saving and term policy with annual premium of 6K. 2 yrs ago, I was offered multi pay CI policy at 3K with precondition. The total premium is almost 12K annually. How do one assess the sufficient of coverage independently?
To know if you are over or under insured, know how much you need first based on your own needs.
Generally if you don't have dependents or liabilities, you won't need death/TPD cover. But if you do, then you must have enough to cover those. Examples include your mortgage, money that the family needs for living, etc. Another rule of thumb people use is 10x of their annual income.
For critical illness, I tend to use 5 times of annual expenses plus a sum for out of pocket expenses. Based on this, you should be able to calculate an approximation of how much coverage you need. Take these figures and compare it against what you have. Then you'll know if you are over or underinsured (you won't get an exact figure, but close enough is good enough). Having a little more coverage will help to hedge for inflation in future as well.
Next, you need to also check affordability. Generally you should not have to spend more than 10% of your income on your coverage. This excludes savings plans as those are not meant for protection. I note that you have conditions imposed on your multipay, so it might not be possible to be within the 10% guideline.
With these figures you will be able to have a rough gauge of whether your situation is okay.
Nigel Tan, Senior Financial Planner (AFC) at Great Eastern Life
Answered on 19 Jun 2020
At any time, your policies should always cover you for any outstanding liabilities (eg. Home loan/ car loan) + a certain amount to cover yours & your family's living expenses.
Eg. If your monthly living expenses is about $3k and you have $100k CI, the amount would probably last you for slighlty under 33 months, about 2-3 years (assuming you don't increase in expenditure from healthcare related costs but is unlikely to remain the same as you were healthy)
If you are providing for dependants and family members For eg. $5k a month, $500k sum assured would last your family about 100 months which is about 8 years. If you have an outstanding loan balance for maybe a property, you should add that to the required cover as well.
A good guide would be 5x annual income for CI and 10x annual income for death which would translate to the number of years you couldve provided for. Less it off your existing coverage and that would be your shortfall in a simplistic form of calculation.
The more accurate one would account for inflation adjusted returns. $80k seems like a lot 10-20 years ago but today it barely covers 20% of an average 4 rm HDB unit. If you feel liek you are paying alot, maybe you need to relook into the type of policies that you are holding on to. Critical illness is generally more expensive.
Insurance Portfolio Summary
Firstly, one of the most important things to do is to have a complete understanding of your existing insurance portfolio. Through this process, it allows us to understand the coverage that we have, any financial gap, as well as to find out whether we are overpaying for our insurance policies.
Key Reasons Why:
Comprehensive Financial Planning
Next, we should spend quality time to plan for your future. For instance, some of the major events in our lives will be similar, e.g. marriage, house, family, children's education, and retirement. At the core of all these events will be your health.
With this in mind, create multiple goals in your life and do a detailed calculation to that end. Through this process, it gives us a better understanding on how much money we need, and how much life insurance we should have.
Regular Financial Portfolio Review
I don't know about the usual practice outside, but typically I meet my clients at least once every 6 months. During each meeting, we will review through the situation to determine whether we need to make any adjustment to the portfolio.
Above all, there is no perfect formula as to when the insurance portfolio can be finalised. This is because things are changing constantly and the only way to remain constant is to change. Therefore, regular reviews and working with a trusted consultant is important to this end.
Finally, here is a general guideline on how much insurance you should have.
10% to 20% of your annual income on healthcare insurance and life insurance
Basic Life Cover = 10 times your annual income
Critical Illness Coverage = 5 times your annual income
But before you get more insurance coverage, please review your existing insurance polices first. This is to ensure that you are not overinsured, or have insurance policies that are not optimised, e.g. overlapping.
I share quality content on estate planning and financial planning here.
Use the above calculator to calculate your guidelines. If you are paying 18k in premium but only covered for $200,000 in sum assured, the insurance is not well structured.
Generally only 10% of your cashflow is all you need to cover your insurance shortfall. It might hit 20% if you have health conditions due to premium loading.
It's all about how much sum assured you have.
It is always prudent to have 10 X Annual Income in the event of death and 5 X Annual Income in the event of Illness.
Your life insurance coverage should be determined by your income/expenses and current plus anticipated future liabilities.
Also I'd exclude your savings policy as it is likely not for protection if its an endowment plan. Treat that as a safe investment tool instead.