How can I determine how much life insurance I REALLY need, and not just based on arbitrary figures? - Seedly
 

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Asked by Anonymous

Asked on 16 Sep 2019

How can I determine how much life insurance I REALLY need, and not just based on arbitrary figures?

B/g I’m 32F single with no dependents, I make $12-$14k/month and my liabilities look after themselves should anything happen to me.

I’m also thinking about spreading out my sum assured between term and whole life products - is this a recommended strategy and has this worked well for anyone?

And also opinion on multi-pay CI plans - worth getting or a waste of $? Appreciate your expert advice.

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If you don't have liabilities or if they are self-cancelling in any unfortunate event, then you really only need CI cover.

There may be various rules of thumb to assess the amount of coverage needed. No right or wrong, but I will share one here which I often use to assist clients to plan: The concept of a baseline amount plus expense replacement.

The baseline is an amount that you need to deal with the unexpected costs of CI/Early CI. Here is an example, say it was a stroke, and you now need a helper to assist you for a couple of years. Now normally you don't need to hire a helper in your daily life, but with a CI incapacitating you, you now have this added cost. Also, you might want to try an alternative treatment or even seek a second opinion, all this is not usually covered by your medical plan, so you will need extra funds for that. How much extra is subjective, some clients think $100K is enough, some want $150K, etc.

Naturally, the baseline is an amount you want to keep with you for life, so this is where a limited payment life plan will come into play. Bonuses that are credited to the policy over the years will form a hedge against inflation over time.

Next, on the expense replacement. You will naturally need to ensure enough money to meet expenses at least, but with inflation, it can be hard to estimate, after all $1.5k/mth expenditure now is going to be $2k/mth in 15 years due to inflation. So while you can estimate expense replacement, do add a buffer such that you can account for the effects of inflation over time. You should aim to have at least 5 years of expense replacement.

Now, the expense replacement portion can be obtained in conjunction with a limited payment life plan, or a separate term plan. This is where some maths needs to be done in order to see what works out better, the term portion covering expense replacement should cover you till your expected retirement age at least, after which passive income from your portfolio will step in to provide for expenses.

Next thing to consider is the split between early and late CI. Again, no right or wrong here, but you will want a meaningful amount to last you at least 2-3 years for early CI, and the rest for late CI.

Multi pay is something that will give you a boost to your coverage, but I view it as something additional to complement existing coverage. The claim conditions for multipay differ between insurers (and looking at it, it may not be easy to claim the maximum amount, not that you would want to)and some have multipay till age 99, but at what cost? One can buy as much insurance as underwriting allows, but ultimately, you are paying for it. Hence, getting the right amount is essential to have sufficient cover without overspending.

I hope you will gain some insights from this. Feel free to ask if you need more clarification or elaboration.

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If your liabilities take care of themselves and you don't have any dependents, you don't need coverage in the event of death.

However, should you fall critically ill and can't earn an income, you would still want to replace that income with a lump sum payout from insurance.

The amount you should have is 5 X your annual income. If you make 14k/mth, that's 840k in Critical Illness Cover.

Why I choose to plan for multiplication of income instead of expenses is because you're planning on surviving your critical illness and during this time, you don't want to lose out on the ability to save and invest for your future. If you only cover your expenses, you'd lose out on the ability to accumulate wealth while you're recovering.

You can cover this protection need for a term until retirement or choose to have some of this continue for the whole of life. I'd personally opt for a third of this cover to be whole of life and 2 thirds of this as a term to 65/70.

You can choose to use the Multi Pay CI plans as term cover because buying them for whole life is probably too costly and multi CI plans currently has no limited premium option.

2 comments

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Question Poster

17 Sep 2019

Thank you Hariz, greatly appreciate your insight and explaining your thought process behind such planning. (Y)
Hariz Arthur Maloy
Hariz Arthur Maloy

17 Sep 2019

I'm glad this was helpful. :)
Cedric Jamie Soh
Cedric Jamie Soh, Director at Seniorcare.com.sg
Level 8. Wizard
Answered on 27 Sep 2019

Personally, I buy more CI than Life.

If I die, so be it.....

If I'm sick.... kinda stressful to choose between dying or spending all my family's money.

For the BARE MINIMUM Life I calculate (and I'm harsh)

Life insurance = I buy more than enough to cover my own liabilities.

My home will be free of debt if I passed away (since the compulsory mortgage insurance will cover full debt), so i exclude this liability. Besides, the home can be sold for $1m to meet wife/kids future needs too (stay smaller house lor, since less 1 person anyway)

I didn't include the wife's financial needs as liabilities since she can still work (BARE MINIMUM)

I didn't include kids' financial needs as liabilities since the wife can handle.

I didn't include parents, they have enough to retire (i consider myself lucky for this)

I didn't add in $10k or $20k funeral costs as I have instructions to go cheap. Go paper cardboard coffin if possible. And 1-day funeral to collect "white gold" can liao, chop chop curry pok.

Soooooo...... that's it. Actually, by this bare minimum, I only need a few thousands of insurance ba.

Insurance advisors hate me because no premature death to sell me.

(but I buy lots of CI lol)

Of course, I didn't buy the bare minimum for Life, but this is for your specific question :)

You just include the most pressing liabilities to make sure you pass on with no burdens for ur family...

Like I emphasised, I am more worried about being sick than dead. Sick is extremely expensive in this world.

PS: all my insurance ARE term plans. Endowment and whole life returns are amazingly low and I hope the market can change for the better...

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Fergus Tan
Fergus Tan

29 Sep 2019

Actually, endowment and whole life returns are unlikely to change for the better.. Simply because a par fund is meant for insurance payouts in the face of claims and there is a need for it to be safe and liquid. A low interest rate environment has been around since 2008, and for the foreseeable future, I doubt high interests will ever come back.. My relatives used to tell me, saving accounts used to have 5-9% interest, without taking any risk and just put money with the banks...
Fergus Tan
Fergus Tan, Senior Partner at Vision Advisory Management
Level 5. Genius
Answered on 29 Sep 2019

I think going to the basis of why get insurance might be more important...

One of the key uses of insurance is to cancel liabilities. In some cases, liabilities and assets are in different stages of liquidity, hence companies have gone insolvent because there are not enough assets to take care of liabilities in the short term, although in the long term liabilities will be nett off. This is a consideration to look at, particularly if you have a lot of illiquid assets such as property. For example, mortgage insurance is crucial, because you don't want the banks to do a foreclosure sale of the house.

Another use of insurance is for income replacement. In the case of critical illness, being unable to work means your primary source of income stopped. You would still need to cover your minimum needs, and not to even take into account change of lifestyle quality. Same for death actually. In that case, you are forming an income replacement fund for your dependents. For example, if your parents are in their 60s, their financial plan might have afforded them financial independence for now, but would they be reliant for you for any allowance or physical care in their 70s or 80s? It's a tough question to answer. Not to mention if eventually you get married and have kids, that's new dependents altogether. I had a married friend who just gave birth this year. She is 39 years old, and she told me she has saved enough for early retirement by 45. Looks like her plans just went off the road.

The 3rd use for insurance is for alleviating minor inconvenience that is not catastrophic. Examples would be a personal accident, travel insurance, home contents, etc. They will hurt when it happens, but it won't change your lives. This includes situations where your house catches fire due to a neighbour, much like in Ang Mo Kio recently.

The last use would be to leave a legacy. My belief is that we are here to leave the world a better place for the future. Our value adds to the world, so as to speak. Even though I am single and no kids, I bought a $1million term insurance when I was 32 years old, many years ago. In the unforeseen circumstance that something happens to me, I will quite definitely change my family's life. If not a wife or kid, then my sister. I've seen enough rich people to know that family background matters during the early years of a kid's development. Some people might set up a scholarship, some might donate to a charity.

With regards to term and whole life, there's no answer really... There's a huge range of term products... You have those that cover till 65/70/75, and those that cover to 99. Whole life, you have those with multipliers, which are essentially embedded term insurances, and you have limited pay products. The key is understanding your final objectives and your cash flow forecast for the next 20-30 years of your life. I personally chose to buy a jumbo term for legacy purpose, but note that this covers death. In the case of CI, realistically most CI policies are NOT going to cover you for the whole of life, due to the cost. So expect to undertake the risk in your 70s or 80s if you are alive and have CI. The easiest way to look at it is that term is usually for protection over a fixed period that you know of. Whole life is the safety that covers the whole of life, regardless of when you die. Hence, a term for mortgage cover makes sense. Term for covering yourself until your kids reach 21 years old makes sense. Term for key-man insurance makes sense. Usually, people would use term to get a larger than usual coverage when their budget is not available.

I personally have low CI coverage also. This is even though I had relatives (1st and 2nd-degree relatives) who have had diabetes, heart attack, leg amputation, lung cancer, Alzheimer's, blood sepsis due to UTI. I think people generally have different beliefs on CI and it's the effect on death or work.

Likewise for Early CI. In most cases of early CI, you are still able to work, hence you won't need extended coverage for that. However, the cost of treatment is still pricey. It is also highly likely that if you do get a CI policy, you would want to get a multi pay anyway. The reason is that if you got CI once, you are unlikely to be able to buy a policy. However, your paradigm then would be that you are more likely to want to buy coverage. So to me, it makes sense for someone who wants to buy CI, to buy a multi pay policy.

Based on your profile above, without understanding the risk you are willing to undertake, it seems to me that it may make sense for you to undertake the protection risk by having a lower coverage, and looking to increase your passive cash flow, ie diverting more of your income into investments for the purpose of attempting to replace 50-80% of your active income. You would then look to take a reduced insurance coverage just in case something really happens in the next 30 years (till 62 y/o). Up to a point where if you are willing to stay in B class wards in restructured hospitals and seek CI treatment there, you can actually undertake the risk and channel more towards investments. (And I would heavily emphasize, THIS DOES NOT CONSTITUTE PERSONAL FINANCIAL PLANNING ADVICE AS I DO NOT HAVE THE FULL FACTS. This is just what I might have done if I am in your shoes.)

Personally, I suggest you talk to a few more planners. If they dress like a waiter and wants to sell you saving plans, walk out. However, if you do find the first meetup consultation helpful, consider paying a fee, or buying a meal :)

If you would like to look for someone who does a deep dive into your goals, values, challenges, and experiences before talking about financial planning, feel free to reach out :) https://rplg.co/talktofergus

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Winston Wisdom Koh
Winston Wisdom Koh
Level 3. Wonderkid
Answered on 27 Sep 2019

No money to hire your own financial adviser?

You are earning $12 - $14K/month.

Or just flexing?

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Brandan Chen
Brandan Chen, Financial Planner at Manulife Singapore
Level 7. Grand Master
Answered on 17 Sep 2019

Agree with Tat Tian & Hariz!

As financial planners, we can't provide specific financial advice online without fully understanding the whole picture of things.

Based on the information you shared, here are my thoughts:

1) Death cover is no necessary since you do not have any dependents

2) Make sure you have health insurance!

3) Main concern for you would be critical illness coverage. Rule of thumb would be about 5 - 6 times of annual income for CI Coverage. This can be further broken down into ECI vs CI. Would suggest for ECI coverage to be approx 1 - 2 times of annual income and 3- 4 times for CI coverage!

4) The rationale for using income instead of expenses to compute coverage is so that you can still continue to contribute to your future retirement when you recover from any CI

5) A mix of whole life vs Term for such coverage would indeed be a cost-effective method as ECI term plans are pretty expensive, especially if we add up the premiums for the entire duration.

Perhaps it would be more beneficial for you to arrange for a coffee chat with a financial planner so as to provide you with a better understanding of your needs!

If you would like to, you may always reach out to me via my email: [email protected]

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Loh Tat Tian
Loh Tat Tian
Level 8. Wizard
Updated on 17 Sep 2019

I have to say based on your requirement.

1) You spelt out a specific situation with specific needs and concerns You. That is considered asking for Financial Advice. Anyone who tells you otherwise is not speaking the truth. Under MAS regulations, this requires a specific process simplified as EGADIM

Establish the goal/relationship

Gather needs/data

Analysis of the data

Develop the plans/recommendations

Implement the plan

Monitor the plan

So I will not touch on any plans etc and other strategies. You want advice, you get guidelines only.

For what you informed, we can only do guidelines like,

1) no dependents, no need for coverage for a dependent. Do not need that 10 years annual income for death. Liabilities cover themselves

2) 5 years annual income for CI (income replacement). As Hariz has mentioned.

3) Multi-pay CI plans. No scope no nothing, I am afraid I cannot give even a guideline for this. Rather, I can only inform you that to beat the BTIR, a guideline of 6% returns is needed. Else, getting the multi-pay might be worth it.

Please get formal financial advice, from others who care. Not 1 who have no fiduciary duty to you.

2 comments

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Question Poster

17 Sep 2019

Not sure why the hostile attack on my question which seems to be on tangent with what other community members have been asking… I place my question within my personal context for ease of reference to a specific situation because most advice out there already gives me enough generic advice I need, including all the similarly regurgitated figures you’ve thrown out. Nowhere have i suggested that I’m eliciting free financial advice in the forms you suggest. I’m here merely to seek to understand the principles and thought process behind the usual advice given. Isn’t this what the community pages are here for? Against your assumptions, I have indeed previously sought formal financial advice before but am left none the wiser, due to less than competent financial advisors out there. Which is also why I’ve taken to this platform, to hopefully weed out more helpful experts in this community from whom I may ask formal help from. But only select experts who are willing to go beyond the usual generic advice recited enough times around the internet, and actually seek to understand the individual needs of their clients, without having to (explicitly) place self interest first. So yes, no need for your generic unhelpful advice and no need to insult my intelligence by suggesting that i’m here to try and score free financial advice. If you had no intention to help you shouldn’t have wasted time posting.
Loh Tat Tian
Loh Tat Tian

17 Sep 2019

Sorry if it appears to be hostile. This is to set the record that these people are putting their license on the line when they give you advices. I am not under it though I am under the FPAS guidelines. Hence am reminding those who are shining some light on this.