Choosing the Right Amount of Life Cover

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I’m going to be dealing with an issue that is on one hand amazingly basic, but on the other hand extremely important – how do you calculate the amount of cover that you need to ensure your loved ones are adequately protected should the worst happen? I am often surprised when speaking to people at the differences in approach to this subject. What I will suggest is a combination of common-sense allied to the ability to calculate bespoke cover to particular circumstances.

I still have my old insurance textbooks which deal with this issue in a very linear way, suggesting that peoples’ lives were predictable and uncomplicated.  I doubt that this has ever really been the case but it is completely untrue now, especially for the Globally Mobile Expat.

There are two key elements in assessing the level of cover that is appropriate. The first is the amount of debt that you have and what your essential living expenses are. It is important to work out a household budget and look at what you and your family would need to cover if you are unable to work, or even worse die prematurely.

Death is an incredible shock and inevitably forces a household to confront potential change.  Nothing can cushion the emotional blow but it is a great comfort to know that your family will be financially secure should the worst happen.

Life cover is primarily about meeting capital obligations. Ideally if finances permit, essential expenses should be met by income protection and major financial commitments by life cover.

The biggest financial obligation that anyone has is almost always a mortgage. In some countries, like Ireland, it is compulsory to take out life cover with every mortgage purchased. In Singapore, we haven’t gone that far, but it is essential that a mortgage should be totally extinguished on the death of one partner. This not only removes the need to fund a major and expensive item but provides a remaining partner with an asset that may be used to manage a different financial environment.

All debt is a major concern where a bereavement leads to a major drop in income, so bank loans, car loans and other obligations need to be assessed in working out how much cover to take out. The ideal scenario is to combine cover to eliminate debt with a multiple of income.

The other major issue is affordability.  What ‘affordable’ means will vary from family to family and is dependent not only on your income level but on your priorities.

One important point is that you should buy cover at as young an age as possible as this will mean it is much cheaper and will often obviate health concerns.

When was the last time you checked that you and your family are adequately protected? Contact your AAM Financial Planner now or email [email protected] to arrange a review of your cover and have the peace of mind that comes with knowing that whatever happens, you are prepared.

Ian Black
Head of Wealth Solutions
AAM Advisory Pte Ltd

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