# How much insurance one really needs?

## Insurance analysis for self is a quick and simple way to estimate your insurance needs.

An insurance analysis 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 after this insurance analysis.
It is prudent to note that the shortfall can be less than this insurance analysis 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!
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. Before I was a Certified Financial Planner, no insurance agent came to me before and offered such details, or offer to do insurance analysis for my needs.
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.
If you need advisory/consultation to quantify your insurance needs WITHOUT any obligation to buy any insurance, you could check our my advisory services HERE.