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
$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.
