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Insurance Needs Calculator
This calculator helps you figure the total insurance coverage you need, and whether you’re adequately insured.
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Assumptions
Life insurance calculation
A sum to cover your annual household expenses for 10 years or by the period you have indicated. If you have children, the education fund required is also added into this sum.
Existing savings and investments are taken into account.
Disability calculation
A sum to cover 10 years of annual household expenses in the event of disability.
Critical illness calculation
A sum to cover 5 years of current annual income in the event of critical illness.
Early critical illness calculation
A sum to cover 2 years of current annual income in the event of critical illness.
When Do You Need to Buy Insurance?
Insurance contracts provide you with a sum of money in the event of an unfortunate situation, in exchange for smaller sums paid before it occurs, called premiums.
But how do you know when you should get insured or if it’s just a waste of your money?
Figure out the Cost of Premiums vs Your Cost of Risk
The price to pay for the insurance premiums must justify the risk that you are eliminating from your life. We buy insurance to cover ourselves from potentially large medical bills.
Weigh the Opportunity Cost of the Sum
Assume you have that $500,000 lying around and you would be able to pay for the medical bills with that liquid cash. Since such medical emergencies are unforeseen and sudden, you can’t invest it into a longer term investment vehicle that could earn you higher returns and will have to keep it liquid in your bank account.
Then the question is, would you want to keep it highly liquid for such sudden unforeseen bills and earn little to no interest? The savings account interest rates could be as low as 0.05%.
Or would you prefer to have it invested in a low risk investment vehicle that earns 3% per year, while you pay an insurance premium of $600 per year (0.12%), and have the money earn an additional 2.88% interest?
Consider the Size of the Risk
Decide if your risk factor is one you can personally take on.
For instance, some mobile phone insurance policies cover your device up to $1,000. But the benefit of the coverage also depletes as the phone is closer to its average two-year lifespan. For a premium of about $120, the cost is 12% and seems rather high in comparison to 0.12% for the health insurance.
It’s all about understanding how big a risk is to you and whether you are willing to pay to be covered for that risk.
Planning for Your Legacy
We may plan for our retirement with certain assumptions in mind, such as our planned retirement age and expected longevity, but we cannot be sure that things will not change.
An annuity product provides us with an assurance that we have a lifelong stream of income. At the same time, if we do pass on earlier than expected, part of the unused funds can be gifted to our family. A legacy plan on the other hand could also help to provide a $1 to $5 leverage on your savings, creating an after-life asset that is multiplied by 5 times.
Insurance coverage is part of holistic financial planning, and we should always consider the affordability of the premiums and the amount to insure, according to our incomes. Check out this article to know how much insurance is enough.