A case study based on Total Needs Approach:
Say, Mr Lim, aged 35, earns $ 100k annually. He is married with a 3 years old son. Should he dies, he wants his family to have an annual income of $ 60k for the next 25 years, with the first payment due his death. He also needs to ensure his son is provided with at least $ 150k for his tertiary education in 15 years time. His biggest debt includes his house mortgage with $ 250k outstanding amount. His wife is also working and will be able to service the house mortgage with her salary.
Net worth statement
Assets
1. House market value = $ 500k
2. Equity and unit trust = $ 50k
3. Bank deposits = $ 10k
4. Existing life insurance = $ 100k
5. EPF = $ 200k
6. Group insurance death benefit = $ 30k
Total assets= $ 890k
Liabilities
1. Outstanding house mortgage = $ 250k
Calculation
A conservative projection of 5% per annum of money growth, slightly outpacing inflation.
Present value of annual income
PMT = $ 60k, i = 5% , n = 25 years, PV = ?
The Present Value is $ 888k (good number!)
Present value of son's education cost
FV = $ 150k, i = 5%, n = 15 years, PV = ?
The Present Value is $ 72.152k
Total liabilities = $ (250k + 888k + 72.152k) = $ 1210k (that's 1.2 million).
There is a shortfall of $ (1210k - 890k) = $ 320k. This is a rough figure for the additional insurance coverage needed.
It is prudent to note that the shortfall can be less than this because:
1. Existing investment and bank deposit could earn compound interest over the years if his wife manages his portfolio well after he is gone.
2. Assuming the sole beneficiary of his EPF fund and life insurance policies is his wife, this lump sum amount can also be invested to earn compound interest.
3. We all know that properties value appreciates over the years!
What do you think of this approach? Is it fool proof? I am sure when you first started working and bought your first insurance, your agent only asked you how much premium you can afford to pay per month, and then he will quote you the coverage accordingly. No insurance agent came to me before and offered such details. Okay, then again, I would not be interested with all this at that time, plus, when you are not married, you have no dependent yet. However, when reaching certain stage in life, I believe it is critical to look into your insurance coverage to ensure all financial risks to your family are minimized should you pass away.
Now, can anyone quote me the approximate annual premium for life insurance coverage of $ 300k?
LiewCF,
ReplyDeleteThere are alot of proxy to buying a life insurance that can be very expensive. I written a few times on that on the proxy for life insurance.
Of course i am not saying that we should skim on medical insurance which is largely more important than life.
Hi Kris, I only saw 2 old articles under Insurance. You did mention about evaluating life insurance needs from outsider point of view, which I can't agree more. Is this the proxy-related topics on insurance you mentioned?
ReplyDeleteOh, by the way, mine's Lieu instead of Liew actually - LiewCF would be the pro tech blogger :)
Haha..sorry for the name mix up. I remember the popular blogger LiewCF, so when you started your blog, i thought he started to dabble in finance related stuff.
ReplyDeleteOne proxy is buying mutual funds with insurance features and another one is MRTA for your property. :P
Hi there, just curious if the calculation for PV for annual income is correct? Just for fun, i tried to practice calculating it but I arrived at RM845,636.67 instead of RM888k.....help?
ReplyDeleteHi Anonymous, thanks for stopping by and leaving comments!
ReplyDeleteIf you use Begin mode [type = 1 in Excel]instead of the default End mode [type = 0], you should arrive at the figure - 887.918k :)
Reason being, if Mr Lim died in January 2012, his family would need to insurance payout immediately instead of Dec 2012.
However, in investment, End mode (by default) is Okay because you only get return end of the period, not the day when you invest your money.
200k life insurance is enough for me. Of course, more is better (if I have money). ^_^
ReplyDeleteJayce, yea, especially if you are married w/ kids in the future. Sure more than 200k :). Cheers
ReplyDeleteThe approximate annual premium for life insurance coverage of RM300k as follow:
ReplyDeleteMale, 35 next birthday, non smoking, occupation class 1
Investment-linked Policy
Annual premium: RM1,500.00
Scope of coverage: death benefit/total permanent disability + policy waiver rider
Term: 65 years
Term Policy (non participating policy)
Annual premium: RM2,599.00
Scope of coverage: death benefit/total permanent disability
Term: 35 years
Nasir.
No 36 critial illness?? , Nasir. That might explain the lower annual premium??
ReplyDeleteI don't remember such a low premium for RM300K for investment linked ones.
In both cases best to take the 65 year term aka up until age 100.
Kris
Yes, you're right Kris.
ReplyDeleteIf critical illness rider attached, the annual premium is RM3,200.00 (critical illness sum insured RM300k)
Error: premium waiver rider NOT policy waiver rider
Nasir
Thanks for the reply Nasir. I suppose the term policy comes with 36 critical illness?
ReplyDelete