How much insurance coverage and sum assured is enough?

That is always a question that we like answered: “Just how much insurance cover do I need?” The best way to do it is to sit down with a trained and professional financial consultant to go through a financial needs analysis and review. Information with regards to your financial situation and goals will be gathered before any determination of how much insurance cover is sufficient.


However, not everybody is comfortable revealing the most intimate of financial details to a stranger and not everybody is lucky enough to meet a financial consultant who is professional and well-trained, willing and able enough to do a competent job and not just peddle financial products. 


If you are in the same situation, below are some pointers which you may want to keep in mind. (For ease of calculation and explanation, we are not taking time value of money and inflation into consideration.)


Financial Obligations
Take into account any financial obligation that needs to be paid off if premature death or unfortunate event such as total & permanent disability (TPD) or critical illness should occur. Examples could be business or personal loans or debts to be repaid or mortgage loan repayments. 


For loans where the principal amount is reduced as repayments are made, you may wish to consider a reducing term insurance plan.


Financial Support
Is there anybody who is dependent on you for financial support? Maybe aged parents, spouse or children? If there is, you may want to plan for the financial support to continue should any unfortunate event happen. For example, you may be planning to provide for your aged parents or a young kid for the next 20 years with an annual sum of $20,000. You would need a sum assured of $400,000 should that sum of money be needed right now. 


Again, a reducing term insurance policy may be suitable in such an instance.


Financial Gift
Is there a lump sum of money you would like to provide if an unfortunate event should happen? Is there someone you would like to leave a financial gift for when you are not around anymore? Or maybe a charitable cause you would like to contribute to?  If there is, be sure to take this into consideration in your calculation of how much insurance cover to buy. 


If you have a fixed policy term in mind, a level term insurance may be suitable. If budget allows and you prefer a plan with accumulation of cash values, a whole-life participating or investment-linked policy. 


Replacement of Income
This is the tricky one where you will read of many differing opinions. The reason why this question is not so straightforward to answer is that guesswork of your income growth rate is involved.


There are general (very general) rules of thumb for this though. 
You need to know how many years you would like your income to be replaced for. For example, if you would like your income replacement to be for 10 years. You will need a $500,000 sum assured if you are earning $50,000 currently. That will enable you to withdraw $50,000 per year for 10 years.
Alternatively, some may suggest for you to have insurance cover of 20 times your annual income. If you have a cover of 20 times your annual income, an investment return of 5% from your insurance proceeds will be able to replace your current income perpetually. 


As highlighted at the beginning, a financial needs review and analysis with a qualified financial professional is still the recommended option.

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