08 July, 2015

How to Calculate Your Coverage When Buying Insurance

The following are some of the formulae for a suggested needs analysis and an explanation of how they might be used.  This is a simple, and useful means to check if your coverage is sufficient.


Income Protection
This is the amount your family would need in the event of your death.  This is especially important if you are the sole breadwinner, or the principle breadwinner.  The whole idea is to have enough set aside that their standard of living is not severely affected.  Things to consider include funds set aside for the future education of your children, for the maintenance of the house and for the settlement of debts.

The Formula: (Monthly Amount Required x 12 x No. of Years) + Immediate Expenses + Outstanding Liabilities + Emergency Fund - Existing Death Coverage

The monthly amount required is the amount needed to pay the monthly bills with a little more set aside to maintain the standard of living.

The number of years refers to the time this funds need to last before someone else in the family is able to address the imbalance in the family income stream.

The immediate expenses are the expenses of a funeral, the estate expenses and the hospital bills, if any.

The outstanding liabilities include debts in the name of the deceased, or undertaken on behalf of the family.  They include housing loans, student loans, bank loan and car loans.

The emergency fund refers to the buffer amount in the family savings account that might mitigate this loss of income stream.

The existing death coverage includes any and all arrangements that would pay out upon your death into your estate.

The calculation for the accident coverage also uses this formula since the considerations are the same upon death.  If they lead to disability, then they use the formula below.

Disability Protection
This is the amount required by you to maintain your standard of living in the event of a disability, as well as the costs involved such as the acquisition of wheelchairs, walkers and such; the modifications needed to your living space to accommodate your unfortunate inadequacy; the cost of a caregiver and the immediate and ongoing treatment which may not be covered under a hospitalisation plan.

The Formula: (Monthly Account Required x 12 x No. of Years) – Existing Disability Coverage

The monthly amount required is the same as the above.

The number of years here refers to two things.  It refers to the time this funds need to last before someone else in the family is able to address the imbalance in the family income stream.  It also factors the number of years you will live with this disability.  In general, 20 years is a reasonable period to consider.

Critical Illness Protection
This amount factors two things.  It factors the amount required by you to maintain your standard of living in the event of a critical illness.  And it considers the cost of treatment.  This is important because even though you may have a hospitalisation plan, your condition may require innovative forms of treatment that may not be covered in the schedule of treatment.

The Formula: Total Lump Sum Benefit Required – Existing Lump Sum Benefit Required

$700,000 is a reasonable amount required in Singapore for a comprehensive treatment plan for cancer, a major killer.

Hospitalisation Expenses
This is the amount required by you for your daily expenses.  This is especially necessary for people who are daily rated such that not working would mean no earnings, and for proprietors.

The Formula: Monthly Earnings / 30 – Existing Coverage

The monthly earnings is the average earnings per month.  This is used to calculate the daily earnings.  If that is already known, then it is unnecessary.

Retirement & Savings Requirement
The retirement requirement is the amount required to maintain a reasonable standard of living upon retirement.  This is important because in Singapore, the average retirement age is between 62 to 65 years of age.  However, the life expectancy of a man is 84 years and for a woman is 88 years.  This means that the average person is expected to live more than 20 years without an adequate income.  This is also the age where medical expenses rise, as well as the attendant costs.

The Formula: Monthly Amount Needed x 12 x No. of Years – Existing Arrangement

The monthly amount needed is the amount required by you to maintain your standard of living.  A reasonable amount to start would be 80% of your last drawn salary.

The number of years is the number of years you expect to live.  We normally take it as the average life expectancy less the age of retirement.

Summary
It is important to note here that the vast majority of people are still underinsured.  We live in an age where people do understand the need for insurance.  However, people tend to underestimate their liability and their requirements.

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