Life insurance is the most basic form of risk management to protect your family needs through adequate insurance coverage against major illnesses, disability and death. This is also to ensure that all financial goals and objectives will still be met should any of the unforeseen adverse events take place.
The basic idea behind life insurance is to provide for loss of your active income. Currently, your family would be living on active income from your work or business, so if that source of income is lost due to disability or death, then your family would have a hard time surviving. If you are the sole breadwinner, insurance is even more critical as there is little backup, i.e. your spouse is unlikely to generate the same level of income even if he/she is to re-enter the work force.
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How Much Should I Be Protected For?
While there are some rule of thumb calculations using a multiple of salary as a guide, the best method is to go through a Needs Based Analysis. Needs Based Analysis is a framework used by financial planners to determine the amount of money which is required for your family in the event they lose your income. It generally covers the amount of money required for the living expenses of your family, the children’s higher education, amount of loans outstanding, estate which you would like to leave behind for them and any other needs.
Needs Based Analysis will include projections like inflation and investment returns, so make sure you understand the assumptions used by your financial adviser in determining your insurance needs. A stress test on the assumptions is recommended to see how different rates can affect the total amount required.
Dr Wealth Insurance Calculator
Dr Wealth contains a comprehensive calculator which will take you step by step to determining the amount of insurance which you need to protect your family’s needs. Dr Wealth uses the Need Based Analysis approach which is employed by certified financial planners worldwide. Sign up now at Dr Wealth to get your insurance needs calculated.
About the Author
Calvin Yeo is the Managing Director of Doctor Wealth Pte Ltd (www.drwealth.com), which is a financial planning platform. He is also a Chartered Financial Analyst (CFA) as well as Certified Financial Planner (CFP).