Karen Tang, CFP®: Certified Financial Planner in Singapore

How Much Life Insurance Do You Really Need?

Everyone needs insurance, whether you are a young working adult, a new parent, a homemaker, or a retiree.

According to the Life Insurance Association (LIA) Singapore, the mortality protection gap represents the financial gap to cover dependents’ needs such as outstanding mortgage and car loans, children’s needs such as education savings and living expenses, and funeral costs over a definite period in the event of death.

It estimated that the average protection needs against the death of a working adult with at least one dependent amount to roughly 9 to 10 times the person’s annual earnings. This, of course, will vary from person to person.

It also says that people need coverage to provide for family needs during the assumed recovery period of 5 years for a critical illness or until the insured person can return to work or adjust his lifestyle needs. But Singaporeans have only met a fraction of this.

Quantifying Your Life Insurance Coverage: Death Benefit

How do you calculate the loss of economic life value or human capital? How much life insurance do you and your family need? Being underinsured is a risky situation – in the event of an unforeseen accident or illness, you can lose the ability to work for an extended period of time. Needless to say, this has repercussion on your finances.

The Simple Rule-of-Thumb

In the past, this quick and easy method is used to determine death needs. You multiply your annual income with a factor ranging from 10 to 15. For example, if you earn $80,000 a year and a factor of 10 is used, this works out to $800,000.

But this is too simplistic given that there are other important considerations. What about the ongoing living expenses of your spouse, children and parents, future obligations when you are no longer around to provide for them? Hence, a more comprehensive approach needs to be used to determine death benefit.

The More Realistic Computation

This is a systematic way to derive your death insurance needs. It is mathematically sound and best of all, it takes the guess work out of it. There are 2 things to consider here: your financial obligations to your dependents and your current resources.

Part 1: Financial Obligations

a. Liabilities
This could include:

  • Mortgage
  • Car loan
  • Personal loan
  • Outstanding income tax
  • Unpaid credit card bill
  • Funeral expenses

b. Future living expenses of your dependents
If you have no dependents, then there is no need to plan for this provision. However, if you have dependents, you would need to determine their living expenses so that they can still maintain the same standard of living after your demise. This amount will be multiplied by the number of years to support them till.

For example: You currently contribute $4,000 to your family’s expenses and you give your parents a monthly allowance of $1,500. You estimate that you will continue contributing for another 15 years until your kids join the work force. As for your spouse and aging parents, you assume their life expectancy and calculate accordingly.

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