If you are here on this topic it is likely:
- You are wondering what should be the right standard insurance that we should be buying
- Trying to validate your current insurance planning that an adviser have helped you with
Being in this field, one of the most asked question is how much coverage do I need. I get my fair share of insurance questions.
Just like when friends find out I am “into stocks”, the most common question is “how much did you make???”
By the end of this article, I hope you will be empowered to do your own protection planning AND reach a level of insurance protection that are more or less on the right path.
I am also going to provide the FREE resource that helps everyone determine to a large degree how much insurance coverage they need.
And the resource will explain how this coverage amount comes about. The thought process that went into the coverage.
And through this resource, we sought to uncover some half-truths, myths and truths about insurance protection.
Personally, I feel very strongly about this resource, that I will passed to my friends as a basic insurance reading, if they seek an understanding on insurance to
- to optimize the expenses on insurance
- to not get too far from the right way
- prevent from being con by advisers who are more salesman, less competent
- seek knowledge on what is the right thing to do
The real question behind your question
When most people ask the question “how much insurance coverage do I need”, what they are REALLY asking is:
- I don’t have so much money, I want to insure just enough
- They say that insurance is important, and I want to do the responsible thing
- Which is the best product in the market?
- The insurance coverage that I have currently, is it similar to the people around my age group and how responsible am I in managing my family and my life?
These are valid questions and in all honesty no one wants to be seen as someone who makes bad decisions. If there is a real problem, you would want to solve that problem. However, life is tough and we only have this much disposable income to work with.
The comfortable thing is that, while working with a limited disposable income (like me!) you can reach a level of insurance coverage that won’t go too wrong.
Insurance Coverage for no Two Person are the same but…..
If your best friend and you are roughly the same age, it doesn’t mean that both your life situation are identical.
Due to that, the true coverage that you require to protect against various risks will be different.
I could advise you that you require a $1 million coverage. This will work well for your best friend since your best friend’s life is simple, his daily expenses are moderate and he is not married. However, if you are married with three kids and a spouse, that $1 million life coverage might not be enough.
Due to the difference in life circumstances, no two situation is the same, and hence there is a justification to get an adviser to provide professional advise on life protection.
While your friend and your situation may be different, I believe there is a baseline or standard level of protection that each of us can be covered to, that we won’t go too wrong.
How do we achieve the standard level of protection?
You could get to a Responsible Level of Insurance Protection Planning
The problem with professional advise to achieve adequate insurance protection is that the quality of advise may not always be competent enough to help you come up with an adequately comprehensive plan.
I am sure you encounter advisers who are more product pushers, focus on churning commissions for themselves or less than competent in their overall advise.
In 2011, Monetary Authority of Singapore (MAS) conducted a Mystery Shopping of Financial Products and it underlines this unhealthy advisory culture:
- Most representatives obtained information on the shoppers’ personal particulars and employment but other pertinent information such as the shoppers’ investment experience, financial objectives, risk preferences and financial situation were less frequently gathered
- The top three categories of products recommended were endowment insurance policies, unit trusts and investment-linked life policies. Almost a third of the product recommendations were assessed by the industry panel as unsuitable. The main reasons cited were that the products recommended did not match the shoppers’ financial objective or their stated investment horizon.
This has an important impact to a person like yourself, attempting to find out about how much coverage do you need and trying to do the responsible thing.
The meter gauge below takes us through how comprehensive your insurance protection coverage can be:
The meter ranges from Totally not covered on the left to Over insured coverage on the right.
Most of us will lie somewhere in the middle of this gauge.
Ideally, you would want your current coverage to be at Hedges all your Health Costs Very Well. However, chances are based on surveys done by insurance companies, speaking to people around me and by the way the insurance protection governance is shaped, you will be at Does not hedge much health costs.
The way to think about protection is get as close to Hedges all your Health Costs Very Well.
If you are covered around the range of Hedges a large part of your Health Costs, then I think you are in a good place. You will feel financial pain but what you have resolves a large part of the monetary costs should the health event occurs. This region is what I determine as fundamentally sound coverage.
Unscrupulous advisers gets you over-insured in a few areas but leave you under insured in others. You end up spending much more periodically and depriving your cash flow for other goals.
To get you from left of the meter to the right, you need to have a competent and trusted adviser. Good adviser is a dime in a dozen.
The alternative way, is to build up your competency so that you can move up the meter so that you can Hedge a large part of your Health Costs.
Can you become competent to hedge a large part of your health costs by learning on your own?
What are the Insurance Protection Competency you Need?
Advisers tell me that they like that their clients asked them questions so that the clients gain the most out of it. I am not sure how much truth to that.
What I do know is that when you have that competency, you take back some of the power in the insurance protection sales pitch.
Adequate competency allows you to:
- Be clear before the meetup to know the areas where you need to evaluate
- What are the standard models, the level of coverage, and how much this coverage will set you back
- Know how much roughly are the costs and incentive to the adviser
- Be able to direct and focus the discussion on the overall coverage
- Ask the hard questions
MoneyOwl came up with a FREE resource that sought to explain the reasoning behind why they believe we should set up our insurance protection in a particular manner.
It is a very digestible EBOOK that you can get it over here.
How you can use this book in your favor is to understand:
- That insurance protection is not the same. There are a few different categories you need to cover
- Which insurance protection is more critical to most working adults, and which you should not get too overly focus upon
- How much it will cost you to be adequately assured in various category (Related: You can check out a standard package for young working adults to get an idea of the costs and purchase it from them)
- How do they (MoneyOwl) determine how much coverage is needed for protection
- The economic incentive of advisers to sell certain products over others
Here are some good illustrations taken from the book:
The above table shows how MoneyOwl derive the life insurance protection coverage shortfall, and critical illness shortfall for 2 different profile of person.
While your situation might not be perfectly identical to Tony or Peter, going through this exercise would allow you to have an idea how to go about computing your own shortfall.
It also shows us that while critical illness is often attached as a rider to your various insurance plans, the coverage needs are different.
The above tables show various ways to cover your total life insurance protection, and critical illness needs. It may not occur to many that to assure a larger amount, the costs might be much lower than you think.
In the table, what the agent stands to earn in terms of first year commission is also illustrated.
The above table shows the live insurance needs. This should be the main focus of discussion, and whether after working with the adviser, you have taken care of your risks well.
The table also illustrates there is a duration to how long you need some of the protection, and that they should be frequently reviewed.
The above table shows that, in order to hedge a large part of your risks, the cost of which method you choose can differ.
The table above illustrates the first year commission that an adviser could earn from selling a standardized life insurance coverage. Different solutions but some do bring more economic incentives to the adviser than others.
The able tables present the premium cost but also what the adviser stands to earn for products from different companies. The costs can be varied.
What is interesting is the last table, where they present that if you are going to have the same coverage for the premiums you paid for a term, you can only be covered a small percentage of what you paid for term with whole life and hybrid whole life plan.
This means that for Company C, to be assured $1 mil till age 70, if you pay the same premium you will only be covered with $112,000 or 10% coverage, and for hybrid, 25% or $274,305.
Knowledge and Competency is needed if you do not have all the money in the world
Insurance advisory is a professional field like law, but they are mostly operated by advisers that do not take things professionally due to the remuneration model.
I would like to state other wise but that is the way it is.
The way you can mitigate the damage is for you to pick up some basic insurance protection knowledge yourself.
Just like wealth building, people cannot execute or get started because:
- they don’t know how to do things (related: why knowledge and wisdom is important to building wealth)
- they are not motivated to (related: why you need a certain level of motivation to build wealth)
This book serves to solve not knowing how to carry out your own DIY Insurance protection.
If you are here, you have some motivation to make your insurance protection plan more comprehensive. With these 2, you can go about taking the steps to correct your insurance protection plan.