September 16, 2009

How Much Insurance to Buy?

As discussed in the previous article, a complete insurance should consist covers you against the risk of life/total permanent disability, critical illness, hospitalization & surgery, and personal accidents. We've also talked about the type of insurance that one can purchase. The next question is how much to buy?

I'll elaborate about my personal opinion on the quantum of insurance coverage to buy according to the basic components of a complete insurance:

Life/Total Permanent Disability (TPD)

You would have heard some agents talked about buying life insurance coverage amounting to 10 times of your annual income. To me, this is a bit far fetch for most of the people out there. Realistically, I'm looking at life/TPD coverage at five times of your current annual expenses (if you can afford it).

The main objective for insurance is to provide for your remaining family members should you passed away abruptly. Once you passed away, your main liabilities such as housing loan(s) should be paid off by your MRTA/other life insurance plan (I hope you have planned for this before your time comes). This means your five times of current annual expenses should last a bit longer now since the expenses would have gone down a lot (minus the housing monthly installment). So, now we're talking about having 7 - 8 years of annual expenses saved. I guess this should be enough to at least make up for the loss.

To purchase life coverage five times your current annual expenses will probably cost you a bomb as well. You might not have the capacity to buy such a huge coverage now. But panic not! To workaround this, check out your employer's group life insurance, which typically provides for coverage in the range of 24 - 48 months of your basic pay. Then you only purchase sum assured for your personal life insurance for the different between five time current annual expenses less your company's life coverage amount. Once your earning power increases, you can then increase the sum assured to the amount equivalent to five times current annual expenses.

Critical Illness

We're talking about getting dreaded diseases here, such as heart attack, cancers and etc. Looking at current medical expenses for such critical illness, I think we should at least be covered for RM100,000. As medical expenses will be more expensive in the future, you should review the critical illness coverage every few years. But, remember, the coverage for critical illness should be less or at least equal to life/TPD sum assured, or else your whole life insurance policy will lapse/terminate once you claim for critical illness.

Hospitalization & Surgery

This is the most important component of the life insurance and the one you will probably use the most. As medical cost escalates by the minutes, it is best to get the biggest medical plan you can afford. As a minimum, get the plan for room & board of RM200. Also make sure your plan has good coverage amount for cancel and kidney dialysis treatment.

Personal Accident (PA)

PA coverage is pretty inexpensive nowadays, i.e. huge coverage for RM100 - RM200 annual. There are many PA packages out there, but generally there are two categories of PA plans:

  1. Basic PA plan: which typically covers only accident death, TPD, and medical expenses
  2. Comprehensive PA plan: which has basic PA coverage, plus extra coverages such as hospital income, funeral and bereavement allowances, and etc.
If you can afford it, you should buy comprehensive PA plan. If you have a family, try to consider family PA plan which is cheaper as a whole.

Some agents might suggest that you purchase at least RM500,000 worth of PA coverage. But for me, i will use the same rule of thumb as life/TPD coverage, i.e. five time current annual expenses less the PA coverage provided by your employer.

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