So, you’ve passed on, life and its adventures have run its course and now you’re lounging in the clouds sipping a glass of cold lemon tea. Life is good – or rather, the afterlife. But, what about your loved ones? Are they bogged down by financial burden that you left behind or do they have the privilege of a comfortable life that you managed to provide them with?
If your answer is financial burden, then it’s time to realise the importance of a life insurance policy. The point to stress here isn’t the importance of having one because it is, and you should have one, but rather the importance of having adequate coverage on your life insurance policy.
How much is “adequate”?
To say a coverage of RM1 million is adequate may be jumping the gun and to some, it may mean being over-insured or under-insured.
Keeping in mind that what constitutes as adequate will require the continuous examination of the circumstances that affect your life and the life of your dependents, a consideration of the things below might reveal that perhaps RM1 million is what is considered adequate for most.
Mortgage
The saying “home sweet home” may not be true for your dependents if they are left shouldering monthly repayments after your passing. To prevent this from happening, you could opt for either a Mortgage Reducing Term Assurance (MRTA) or a Mortgage Level Term Assurance (MLTA) policy. However, maintaining a life insurance policy with enough coverage to pay-off your outstanding home loan amount can also be a cheaper and more efficient option.
Assuming you have a home loan of RM300,000 at an interest rate of 4.25% per annum with 15 years remaining, regardless of which policy you decide on, you will need to have a coverage of at least RM265,648 to ensure your dependents continue to have a roof over their heads.
Coverage required: RM265,648
Childcare and education expenses
Caring for your child is a full-time job that doesn’t pay – at least not in terms of money, but if you are a parent, you will undoubtedly want to continue to provide for the upbringing and education of your child. That translates to the cost of childcare services and/or university fees.
When asked what childcare costs are by The Malaysian Insider, several childcare centres and parents stated that childcare costs range from RM300 to RM1,300 a month per child. Assuming an average cost per month of RM800 for three years, your life coverage would need an additional coverage of RM28,800.
According to our infographic on tertiary education, the cost to put one child through a 3-year degree programme in University Malaya (UM) will cost approximately RM99,714 (cost at the time of writing). This figure is expected to increase by 1.7 times based on an inflation rate of 3% or more given the recent price hikes.
Coverage required: RM128,514 per child
Income replacement
Having enough coverage to pay off your debts and put your child through school aside, your insurance coverage should ideally be able to sustain a comfortable standard of living for your dependents.
The general rule of thumb according to Life Insurance Association of Malaysia (LIAM) is to insure a sum equivalent to 10 times your annual salary.
Assuming you have an annual income of RM54,000 (RM4,500 per month), an ideal sum insured would be RM540,000. However, a closer and more detailed examination of your annual household spending would paint a clearer picture as to the actual amount your dependents would need after your passing.
Coverage required: RM540,000
Looking at the numbers above, an average middle-income person with a child and a mortgage to pay off would need to be insured for a minimum sum of RM934,162.
This however is by no means a ‘one-size-fit-all’ calculation and there are many other considerations – which vary from person to person, to be taken into account. Therefore, it would appear that a coverage of RM1 million would indeed be a closer estimation of how much a person should be covered for.
