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
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
1. Outstanding house mortgage = $ 250k
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.

13 thoughts on “How much insurance one really needs?”

  1. Yes, you're right Kris.

    If critical illness rider attached, the annual premium is RM3,200.00 (critical illness sum insured RM300k)

    Error: premium waiver rider NOT policy waiver rider


  2. No 36 critial illness?? , Nasir. That might explain the lower annual premium??

    I 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.


  3. The approximate annual premium for life insurance coverage of RM300k as follow:

    Male, 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


  4. Hi Anonymous, thanks for stopping by and leaving comments!
    If 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.

  5. 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…

  6. 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.

    One proxy is buying mutual funds with insurance features and another one is MRTA for your property. 😛

  7. 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?
    Oh, by the way, mine's Lieu instead of Liew actually – LiewCF would be the pro tech blogger 🙂

  8. LiewCF,

    There 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.

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