Buying life insurance has always been one of the things to be done in the “adulting” to do list. But what is life insurance exactly and what are the life insurance products available on the market you can consider? Additionally, how much exactly should you be spending on life insurance?
Simply put, when something untoward happens to you and you lose your life, life insurance provides a payout. It is meant to give those who depend on you financial support.
So, before you rush into getting life insurance at the persuasion of an insurance agent, think about two important questions. One, do you have dependents who will suffer badly without your income? Two, what is your budget for life insurance?
How much life insurance coverage you need depends on how many dependents you have currently. If you are a breadwinner in the family, and the household income largely depends on you, your family will really suffer if you — and your income — are gone.
In comparison, if you have just graduated from university, are still living with your parents, and don’t have a spouse or children, you may not need that much life insurance coverage.
As you can imagine, your situation will change along years, especially if you are in your 20s and 30s. So, constantly evaluate the number of dependents and how much coverage you need.
Now, let’s look at the math and calculate just how much sum assured you need. “Sum assured” is basically the lump sum payout you get when you claim life insurance.
First, you need to know your liabilities. So, using an excel spread sheet or just pen and paper, write down what are your key liabilities today. These include loans (mortgage, car loans, student loans), allowance to your parents, and children’s expenses.
Let’s assume that you are a breadwinner in the family with two children, ages 1 and 3. Their monthly expenses, including school fees, tuition fees and pocket money, are about $1,000 combined. You have a mortgage amount of $200,000, and a car loan of $30,000. You pay your parents a monthly allowance of $500.
To ensure that your children have enough to live on until your youngest is 18, your family will need $12,000 x 17 = $204,000. To provide for your parents for another 20 years in their retirement, you will need $120,000. Altogether, adding your loans, you will need a life insurance payout of $204,000 + $120,000 + $200,000 + $30,000 = $554,000.
Note that this is a minimum amount as it excludes university fees for your children.
On the market, there are two types of insurance: term life insurance and whole life insurance.
Term life insurance is more affordable, but it does not have cash value. This means that when you are servicing the policy, you enjoy the coverage and protection, but after you finish paying the full term, you get nothing in return.
As for whole life insurance, it has cash surrender value. If you do not claim from the insurance policy, and years down the road you find yourself cash strapped, you can actually surrender the policy and take back a sum of money. Whole life insurance therefore offers life insurance coverage as well as acts as a savings plan. But whole life insurance is typically more expensive.
Understanding these terms, all that’s left for you is to think about how much budget you have and find a trusted financial advisor to customise the best plan for you.
You can even get a whole life plan and a term life plan to complement the coverage.
After you’ve secured life insurance coverage, remember to evaluate and re-evaluate the coverage every few years.
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