5 Simple Steps on Getting Your Life Protection Coverage Right

Flip on a switch, and your house is illuminated. Open your fridge at night - and you can get a nice glass of cold water. Preparing your kids to attend their tuition classes - and you hope to gear them well for the future.

We live in a world where the stability of our daily lives is highly dependent on being able to maintain our income streams. Our hopes, dreams, aspirations, and comfort, like beads on a string.

What if one day, you are taken out of the picture?

Are your loved ones still capable of continuing with their current way of life, or does the music simply stops for them?

The chance of this potential scenario happening is deemed as a protection gap, and if you truly understand what it means, the terrifying reality should keep you up all night. A protection gap means only one thing: Your loved ones are poised to inherit a humongous sink hole, and they are right at the center of it.

You can only protect your family, if you know how much coverage is needed. Here are 5 simple steps to find out how much life protection coverage you really need.

(See "You Might be in Massive Trouble, Without These 3 Insurance Policies")

Step 1: How much are my monthly expenses?

Your average monthly expenses is a good indicator of what is needed for your loved ones to maintain their current way of life. This includes all expenses, both personal and household expenses.

Take this monthly expense and multiply it by 12 to find out your total expenses in a year.

Step 2: How many years before my dependents can stand on their own?

Dependents are loved ones who rely primarily on your (the breadwinner's) source of income to meet their daily needs. It is a good practice to look towards your youngest dependent and determine the age they would be independent.

For many, this would result in a figure between 10 to 20 years.

(See "Average Singaporeans Need $1 Million Coverage, Have You Had Yours?")

Step 3: What are my outstanding liabilities?

Your car loan, mortgages, credit cards, and personal loans are some of the financial tools which many people utilise to manage their finances and enable one to purchase the many niceties in life.

Add them all up to see how much of the bill have yet to be settled.

Step 4: How much savings have I built up?

Unless you live paycheck to paycheck, which is not a healthy thing to do, chances are you will have put aside some savings over the years. It may be for retirement purposes, or looking to purchase your dream home.

This represents the hard work you have put aside; blood, sweat and tears to save up for the future.

(See "Would You Ever Try Bungee Jumping... Without a Rope?")

Step 5: Putting it all together

This table will provide a quick glance at how serious your protection gap is. The steps below are intentionally kept simple and do not account for inflation (future value calculations), so that anyone can quickly do the math and see where they stand.

Table 1: Your Total Protection Shortfall

How does FSMOne Insurance help you get the coverage you need?

Michael, age 35, is a non-smoker. He is keen on getting coverage for death and terminal illness, so that his financial obligations are fully covered (based on the protection shortfall shown earlier). One method is to utilise term insurance plans which provide high insurance coverage for a fixed duration.

#Table 2: Term Plan (Manulife ManuProtect Term, NTUC Income iTerm, Tokio Marine TM Term)

From Table 2, Michael can get himself a $750,000 sum assured coverage, which comes at a reasonable annual premium of $1,900. Based on FSMOne Insurance's 30% commission rebate, he will enjoy an estimated total savings of $900.

Alternatively, Michael may prefer to accumulate cash value in his insurance plan while seeking protection coverage. In this scenario, he can utilise a whole life insurance plan to do so.

#Table 3: Whole Life Plan (Manulife ManuProtect Life, NTUC Income VivoLife, Tokio Marine TM Legacy LifeFlex)

^{#This is a simple illustration that does not take into account client risk profiles, financial objectives and other types of commitment}

From Table 3, Michael can attain the same $750,000 sum assured coverage through whole life plans, albeit at a significantly higher annual premium rate of $13,100. This is due to the premiums being split between providing protection coverage and investing into the insurer's participating fund which contributes to your policy's cash value. Based on FSMOne Insurance's 30% commission rebate, Michael will enjoy an estimated total savings of $5,600.

Some whole life plans have an option for a minimum protection benefit or booster. This turns the plan into a hybrid between a term and a whole life policy, enhancing the coverage during the years which you would likely have the most financial obligation. For example, a person can seek a basic sum assured of $250,000 with a minimum protection benefit of 3 times ($750,000 coverage till age 65, $200,000 coverage thereafter), resulting in a cheaper whole life plan which sits between the cost of a term and a standard whole life plan.

With different plans available, our team of friendly advisers is able to help you review your financial objectives, long term commitments, and offer you investment and insurance advice specific to your needs. If you would like assistance in reviewing your financial and protection portfolio, or simply to get a quote for an insurance plan, you can contact our advisers at advisory@fundsupermart.com.

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