Determining Your Insurance Needs

Insurance enables you to transfer risk to the insurance company. For example, you may face a financial castastrophe should you be diagnosed as having a terminal illness. Medical expenses and loss of income will pose a financial problem even for the well-to-do. Then the logical question would be: How much insurance to buy? As different individuals have different needs, the amount will vary. But certain fundamental factors will influence the final amount. They include:

• determining the consequences of the event
• the degree of risk you want to transfer and can do so
• the cost of transferring this risk

To assess a person's insurance needs, there are 2 commonly used methods. The first is the multiple income method. This method involves multiplying your annual gross income by an arbitrary number to determine your life insurance needs. Occasionally, this method works but more often than not, it reults in overestimation and worse, gross underestimation.
A more rigid, personalised method based on needs will spare your family much anguish. This is because this method is comprehensive and takes in to account all your life insurance needs. The basis of this approach involves three basic steps: 
1. Estimating the economic resources required by your family in the unfortunate event of your death. 
2. Determining all available financial resources like savings, investments and life insurance plans already in place. 
3. Finally the difference between (1) and (2) to determine the additional insurance required. In order fo ryour family to live comfortably, the best way is to develop an account of all the potential factors in inflation. Determine the expenses you are likely to incur to achieve your goal.

Step 1 Expenses which you should consider include :

1. loan repayments for housing, cars etc
2. taxes
3. food
4. utilities
5. insurance premiums
6. medical bills
7. recreation
8. eduation (for children)
9. other expenses

Step 2 Consider the time value of your sources of income which include:

1. savings and investments
2. the minimum level of income needed for survival
3. life insurance in place (includes group insurance and CPF Insurance Scheme)
4. CPF money

Step 3 Filling the gap. Now comes the crux of the matter - the need to fill the expenditure shortfall.