YOU’VE got life insurance? Yes? Good.
But do you know how much you are covered for?
Probably not enough, judging by the annual statistics released by the Life Insurance Association of Malaysia (LIAM).
According to LIAM statistics for last year, the average cover (or sum assured) across all types of life insurance policy is about RM133,000. For investment-linked policies – that of the most popular and fastest growing type – is RM130,000.
OK, let’s think about this. How long would a lump sum of RM130,000 sustain your family in the unfortunate situation of your unexpected demise?
Well, if you live in Kuala Lumpur, Bank Negara Malaysia (BNM) estimates that a family of two adults and two children will need a living wage about RM6,500 a month to sustain themselves.
Based on this, RM130,000 would be enough to sustain your family for a period of 20 months. That’s less than two years!
Most independent financial planners recommend, as a rule of thumb, a life cover of at least 10 times your annual income.
Adequate coverage essential
Based on BNM’s minimum living wage above of RM6,500 per month or RM78,000 a year, this means that you should get coverage for around RM800,000 at a minimum.
But if you want to be more precise, you really need to calculate your family’s needs if you’re no longer around. This means you need to add the following:
- Amount of living expenses your family needs
Find out how much money your family needs each month to maintain their current lifestyle. Then multiply that monthly figure by 12 and multiply that annual expenditure by the number of years you think your family will require financial support before they are able to be financially independent. Example:
- Your family’s monthly expenditure is RM5,000 per month (or RM60,000 per year)
- Duration when your children/spouse become financially independent is 10 years
Then you need a sum assured of RM60,000 per year x 10 years = RM600,000
- Amount of all outstanding loans, including your mortgage and car loans
If you have any big loan obligations like mortgage or car loans, do not leave this burden to your spouse to pay off on her own. Make sure your life insurance coverage amount includes a sum to pay off all your loans should you pass on.
Do note that many banks require you to take up insurance called MRTA (mortgage reducing term assurance) that will pay off your mortgage if you die. If you have this, then you do not need to include your mortgage amount in your coverage calculation.
- Amount needed for your children’s education
Finally, if you have school-going children, estimate how much their education will cost – from primary right up to university. You can easily get estimates online. So, if you plan to send your kids to a private school or tertiary education overseas, do include this in your coverage amount.
Once you have added all the estimates above, you will have the amount of life insurance coverage that you need.
Do not be deterred if the number is large. These days, you can get life insurance with a RM 1 mil coverage online! This, however, does mean selecting term policies whose premiums are very reasonable as they are pure protection life insurance.
The moment you try to mix investments with life insurance – like the popular investment-linked policy – premiums become very expensive and you are likely to settle for a lower coverage amount than you actually need.
So don’t be like the average Malaysian who is under-insured. Get the ideal coverage that will enable your family to re-build their lives. – April 25, 2022
Malek Ali, CFP is the founder of Fi Life and a certified member of the Financial Planning Association of Malaysia (FPAM).
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
