You’ve heard you need life insurance. But you’re not sure what life insurance is, where to get one and how many times you need to water it a day. 🤷♂️
No one tells us in school that we need life insurance. Usually it's our parents or a mini disaster 😱 that wakes us up to the realities of how expensive being unprepared can be.
It’s okay if you’re not sure what life insurance really is and whether this is something you need. Don't worry, we’ll use everyday concepts and examples to help you make a decision.
So... what’s life insurance?
Think of life insurance as a kind of subscription plan. You pay X amount monthly (also known as premiums), and in return, your family gets money if you die or become permanently disabled.
It sounds morbid but if something were to happen to you, at least your family will be covered financially. 😌
Hopefully you now get what life insurance is, it's time to know:
How much you want to pay for insurance (premiums)
What will they protect you from
The circumstances for there to be a payout
How long you want this insurance to cover you for (coverage)
The thing you want to be aware of is paying too much in premiums. 💸 This is where insurance companies and agents make their money. You'll definitely put a big smile on their faces if you pick an expensive plan you don't really need.
The other problem is that the insurance plans that are sold can be complicated so you might not understand what you’re paying for. 🙄
Did you know? You can claim tax relief of up to RM6,000 per year for life insurance together with your EPF contributions. 😉
Difference between Term Life and Whole Life insurance
There are actually five different kinds - all with its pros and cons. But we're going to focus on the two most common life insurance - Term Life and Whole Life.
Here’s a comparison of the two.👇
Whole Life insurance offers more benefits that Term Life insurance. The catch? Whole Life is more expensive. 💸 For this reason, people recommend Term Life insurance to those with short term commitments or without dependents, and Whole Life insurance with those who do.
If you're looking for more than just insurance and want to invest, Whole Life insurance is for you. That's also why Whole Life insurance costs more as you're not just paying for insurance, you're also into an investment-linked account as well. That money can eventually be taken out for your own use. Term Life insurance doesn't offer this.
Should I buy life insurance?
It really depends on your situation. Start by asking yourself: If I die tomorrow, how would my loved ones manage financially?
Will they have the money to pay for:
Medical bills 🏥
Funeral expenses ⚰️
Rent or mortgage 🏡
If someone were to suffer financially when you die, then the chances are you need life insurance. This ‘death benefit’ will replace your income and help your family financially in your absence.
TIP: Get life insurance as early as possible! The cost of insurance increase with your age. The older you get, the odds of you dying are higher so it’s more expensive to be insured.
What to consider
So you’ve decided to get life insurance. Now, here's a few things you should be on the lookout for:
1. Your financial goals
Is the life insurance to help with your child’s education? Or is it to help with mortgage? Have a clear idea of what this money will be used for.
2. How much in premiums?
Your monthly insurance plan (premium) shouldn’t cost you higher than 6% of your income. If you’re earning RM5,000 per month, you shouldn't pay more than RM300.
3. How much do I want it to cover? (the sum of the payout)
The answer isn’t super simple as it all depends on:
How much you’re willing to pay in premiums
Long-term financial needs
How many dependents you have and what kind of support will need
Whether you are the sole breadwinner 🍞 of the family.
To calculate how much the total payout should cover, use this formula:
Current commitments + Future financial plans - Assets = Payout (the amount your life insurance would pay to your dependents if you die).
The most important thing when choosing an insurance plan is to choose one that best suits the stage in life you’re at. But don't make the mistake of not reviewing your insurance plan every few years. Our life's situation change over time (like having another child 👶), so should your insurance.
This is a lot of info, do you have an example?
We sure do! 👌
Meet Nanook and his two sons 🐻. Nanook works as a seal hunter in his little tribe in Greenland. His work requires him to travel long and far to hunt seals in the Arctic. With ice caps melting quickly, his jobs becomes more challenging every day.
Nanook earns 4,000 polar dollars per month, and his household expenses add up to 42,000 polar dollars yearly. He's got 40,000 polar dollars saved in a fixed deposit for his sons' education which he estimated would cost him a total of 100,000 polar dollars.
Taking his situation into account, Nanook has chosen to take up a term life insurance. He's figured that he'll need at least a payout of 480,000 polar dollars to cover his sons financially over a 10-year period if something happens to him. Here's how got round to that figure:
420,000 (10 years of expenses) + 100,000 (children's education) - current assets (40,000) = 480,000 (payout)
Luckily for him, he’s found an insurance plan that will cost him 100 polar dollars monthly (less than 6% of his monthly income) to cover the sum of the payout. Nanook now has a peace of mind 💆♂️ knowing that his two young sons will be financially protected should anything happens to him. 🙌