February 16

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How Much Insurance Coverage Do I Need?

By Ian Bong

February 16, 2021


If you’re new to buying insurance, I’m pretty sure you’ve asked yourself “How much insurance coverage do I need?” at some point during the purchasing process.

I hope this article can give a bit of guidance on the matter. It’s by no means exhaustive, but at least you get a clearer idea of how much insurance coverage you should have and plan ahead properly.

How Much Insurance Coverage Do I Need?

In this article, I’ll be talking mainly about life insurance and medical insurance for the common people.

Life insurance

If you’re married and have dependents (family members who depend on you for living expenses) – then life insurance is a must. Life insurance pays a lump sum of money for your beneficiaries so they get to continue life as best as possible.

To make sure you have enough coverage, use the following general guideline:

Life insurance sum assured = liabilities + amount for child’s education + (amount for family members to survive monthly x months of support)

What are liabilities? These are debts that your family members will have to bear if you pass away – including car loan, house loan, credit card debts and so forth.

So what’s the logic behind the calculation?

  1. Liabilities – your family members can use the money to pay off whatever debts you leave behind, and move on as quickly as possible
  2. Children’s education – you want to make sure your children’s future is secured, and the best way is to have an education
  3. Living expenses – if your family members don’t work, you need to make sure at least they don’t starve. If you think 6 months should be enough time for your loved ones to get back on their feet, then just multiply the monthly expenses by 6.

Example calculation:

You have a mortgage remaining of RM400,000. Your other debts including car loan and credit cards total RM55,000. You have a 5 year-old kid and you wish to get him or her a private university education. Your family living expenses are currently around RM5,000 monthly.

So your life insurance sum assured should at least be:

RM400,000 + RM55,000 + RM300,000 + RM30,000 (RM5,000/month for 6 months) = RM785,000

This is the bare minimum. If you’d like to include other expenses such as living allowance for your kid during his/her university education, or support your family for much, much longer (for e.g. 20 years) – then the sum assured would have to be higher (in this case it would be RM1.95 million)

Medical Insurance

Medical insurance is a also known as hospitalisation and surgical insurance. Some people also know it as medical card. This is a type of insurance that covers your hospital bills in case you get admitted for any reason (with the exception of exclusions that are laid out in your policy). Most of the time, medical insurance comes as a rider on top of your life insurance, though there are standalone medical cards in the market.

How much insurance should I have for medical expenses?

Medical inflation is a bitch nowadays – runaway inflation has been a problem. While we can’t do much about inflation, we can ensure our medical coverage is enough.

Cost for procedures vary widely, and your hospital bills can be as low as RM20,000 for a simple appendicectomy or RM500,000 or more for cancer.

Thus, in my opinion, RM500,000 limit per annum with no lifetime limit would be a good starting base for majority of people. If you can afford it, bump it up to RM1 million coverage.

Take into account other extra benefits if you need them, such as:

  • Income replacement – some policies provide daily cash allowance while you’re hospitalised
  • Payor coverage – if you get this rider and you’re hospitalised, you won’t need to keep paying the premium during the course of your hospitalisation

Medical policies vary widely between insurance providers – make sure to read the fine print. In fact, medical insurance will constitute a big chunk of your premium payment due to the inflation, so make sure to consider carefully what you need.

Conclusion

I hope this article has helped a bit in answering the perennial question of how much insurance coverage is enough. That being said, everyone’s circumstances are different, so make sure you talk to a qualified and professional agent who understands your needs at your current stage in life.

About the author 

Ian Bong

Chief Writer at Fiholic. Doctor by day, personal finance addict by night.

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