Many people tell us that they don’t need to look at life insurance as their employer has already taken care of that. Although this is a great employment benefit, there are still considerations to be thought through.
Is the level of coverage sufficient?
Whether it will be sufficient comes down to the question: How much life cover do you need? Or better: How much cover does your family need?
There are many ways of determining how much one would need; guidelines, calculators and so on, which will usually give a good indication. Ultimately, how much a family needs is subjective, dependent on their goals and objectives.
Most people have a financial plan for life, some very well worked out, some in the back of their minds. This usually involves an idea about when the mortgage will be paid off, how to pay for the education opportunities for the children, maybe buying a second home, when to retire, how much income is needed in retirement and how much they will save. This plan is always based on the family income and what’s expected in the future.
To illustrate: Say you’re 43 years old, your total annual income is $300,000 and you plan to retire at 65. This means the life-plan can be based on the assumption that, until the retirement date, as a family, you expect to receive 22 years x $300,000 = $6,600,000 – no increase of income taken into account.
So, what if something happens tomorrow and your family is relying on the employer’s cover?
Usually an employer’s arrangement pays out 2 to 3 times the annual salary. So, $600,000 to $900,000 in the above example. This might seem like a lot of money – but that’s only 9% or 13% of the life-plan-assumption of $6,600,000.
If the employer is providing your only life cover arrangement, it means your family will end up having to compromise their lifestyle.
If the employer takes care of your life insurance, typically the insurance is linked to your job. What happens if you leave the company? Especially if the new employer does not offer similar levels of protection or if you decide to take some time off work completely?
There is always the possibility of taking out insurance yourself when the time comes. Having said that, it’s also important to be aware of how insurers work when taking on a new client. Acceptance of an applicant and the cost of insurance premiums are mainly based on health, age, sex, smoker status and term.
If you’re healthy when you apply, you will generally have no issues being accepted. However, if you’ve had health issues, you might find that certain aspects will only be covered by paying a higher premium, some health issues will be excluded from the cover or in the worst case scenario you will not be able to insure yourself at all.
From an age perspective, the older the applicant, the higher the premium. You might reason that the premium you saved, when your employer covered you, will make up for this. That is not the case. As an example, a 35-year-old male with a cover of $1,000,000 until age 65 pays $112 premium per month*, a 45 year old pays $189*.
The 35-year-old pays a total of (30 years x 12 Months x 112) $40,320 whilst the 45 year old pays (20 x 12 x 189) $45,360 in total. You must also take the following into consideration:
- These are premiums based on both male examples being completely free of any health issues. The 45-year-old however has had 10 years more time to incur health issues.
- If there is (has been) a health issue, the premium could be loaded which often means anywhere between a 25% to 100% increase on the premium. Say it’s a 50% increase, the 45-year-old will suddenly be looking at a premium of $284 per month and so a total of $ 68,160.
- The 35 year old has had no worries about acceptance after taking out his insurance, no worries when leaving the company, taking some time off and –during the time he was working for this employer- he has had much higher cover compared to the 45 year old, all of this at a lower cost.
To ensure you are well on target to meet your goals, please book a review meeting with your AAM wealth manager. If you do not have a financial planner yet and require assistance, please visit www.aam-advisory.com or call 6653 6652 to request your free consultation.
Too much cover will never cause problems for your dependents, however too lower cover will always cause problems for your dependents. The question is: What do you wish your legacy to be?
*Premiums are obtained from a Singapore based insurance company and are only meant as an illustration for the purpose of this article and are not guaranteed in any way. They are not meant as a quote for individual cases. AAM Advisory accepts no liability for any errors or omissions.
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