Saturday, September 18, 2010

How much life insurance do I need?

There may be a few method to compute "how much life insurance do i need" but let make life easier by using a simple formula as simple as ABC :

A = Total outstanding debt (including mortgage, credit card and hire purchase)
B = 10 years gross income
C = Total Life Insurance Required.

A + B = C

IF total outstanding debt is RM234,000
Yearly gross income RM60,000 (before EPF and income tax)

Then I may need a life insurance coverage for RM234,000+ (10 x RM60,000) = RM834,000

Wow, sound a lot of money, right?

With RM834,000 and after payment of debt, balance is only RM600,000.

How long can this money last, assume the spending lifestyle unchanged?

If I (my family) have to draw RM2,000 per month to meet all expenses (assume inflation = return on investment)

Answer is infinity, assume the fund can get ROI at 4% (RM600,000 x 4% = RM24,000).

BUT, life is not so perfect. First, inflation comes with surprise. Second, ROI is not guaranteed.

Is this idea is correct? you should have the answer. 10 years is just a guideline. May be 5 years is just right.

Now, you will say, "Come on, it all depends on the COST of life insurance. I can't get 10 years income because the premium will ruin my financial plans." True, I agree 100%.

No direct answer can be obtained from any blog as every individual's financial position is different. A tailor made plan follow by a the discussion with a financial planner is important.

Look for one good financial planner that really sincere. At the same time, be sincere about yourself to him or her else even the best financial planner can't help much.

Next blog will disclose how much is the cost of a RM200,000 life insurance. RM200,000 is only about 4 years plus of gross income if your gross income (before epf and income tax) is RM4,000

Therefore, a RM200,000 life insurance protection is not too much, right?