How Much Insurance One Really Needs

A case study based on Total Needs

Say, Mr Lim, aged 35, earns $ 100k annually. He is married with a 3 years old son. Should he die, 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. Employees Provident Fund (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 real estate properties value appreciate over the years!

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.

LCF on Personal Finance
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