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Elegance Clearly Surely
Posted 18 May, 2017 by Clearly
in 2 cents worth
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How much should I spend on Insurance each month? [An Elegant Answer]

If only I could refer to the Hitch Hiker’s Guide to the Galaxy for this one.

According to Adam Douglas’s 1979 science fiction bestseller, the answer to The Ultimate Question of Life, The Universe, and Everything is…

…42.

When asked how he came up with the number:

The answer to this is very simple. It was a joke. It had to be a number, an ordinary, smallish number, and I chose that one. Binary representations, base thirteen, Tibetan monks are all complete nonsense. I sat at my desk, stared into the garden and thought ’42 will do’ I typed it out. End of story.

Ink Blot. Or is it just 42?

I see 2 dolphins campaigning for peace and the right to eat mercury-free tuna. And of course, I see the number 42. What do you see?

 

Answers don’t come any more elegant than that.

Back to our task on hand, and instead of asking about Life, we merely need an answer to:

How much money do I need to spend on Insurance each month, so I get covered nice and snug like a caterpillar in a cocoon, without experiencing third world poverty one week before payday?

 

I’m no Adam Douglas, but I have an equally elegant answer to that.

Ready?

In two words: It depends.

 

Now, put down your pitchfork before you hurt someone, please! Allow me to expound, elaborate, and perhaps dazzle you with my (yet undiscovered) logical brilliance.

Here are some crucial pieces of reasoning that I have worked out:

 

The answer has to be a percentage of Income
Absolute figures won’t do, since the same amount of cover afforded by (say a monthly amount of) 1000 dollars is absurdly excessive for a fresh graduate and laughably inadequate for a shipping tycoon.

The answer is a function of Age
Life Insurance cover will get more and more expensive with age. All things being equal, an older person should expect to spend more on Insurance than a young lad.

The answer is a function of Income
Seems contradictory to the idea of a percentage right? Not so fast. The higher a person’s income, the more he has to spend on Insurance to protect that income, that I agree. But as we shall see later, some crucial pieces of Insurance are actually independent of income.

The answer is a function of Financial Responsibilities (a person has)
Yeah, I can hear you mutter “No shit, Sherlock”. The more financial obligations and responsibilities a person has, then obviously he needs more Insurance. Ego he has to spend more on it. Guess I won’t be winning the Nobel prize for figuring this one out.

 

Ok. That should almost set the stage for the great revelation.

Just one last point to clarify: Insurance, to me, means purely for protection purposes. Plans with an investment element, savings element, or returns element are all ruled out of this calculation. At least in my book. This rules out Whole Life Plans, Investment Linked Plans, and Endowment Plans. You can buy them if you fancy, but for the purpose of answering The Question, I shall not acknowledge their presence.

 

The Question: How much should I spend on Insurance (pure protection) each month?

The Answer: Anywhere from 7% – 15% of your salary

 

As with a great many things in life, this answer is best illustrated with examples.

 

Hypothetical Harry

 

Hypothetical Harry is a 30-year-old man who earns an income of 3000 a month (36k a year without any bonuses). Harry is no stranger to being used as an Insurance example, given the penchant for authors to use 30 year-old men as the industry standard. He is single and has no financial dependents, so what would his insurance needs consist of?

A fully upgraded Medishield Plan (Harry read our article here and is enlightened)
200k of Critical Illness Cover
200k of Personal Accident Cover
20k of Disability Insurance Income
50k of Early Stage Critical Illness Cover

Harry knows that all the major types of Insurance Cover are accounted for in this list, and sets about buying the necessary plans. He neither chooses the most expensive nor the cheapest plans, preferring to stick to the middle ground. He is also wise enough not to reveal which Insurers he buys his plans from, since that is not the objective of his example.

Here is what Harry buys – and what it costs him annually.

 

A 200k Sum Assured Term Plan (Mainly for the Critical Illness cover, but it also comes with Death and Total Permanent Disability Cover) – $900

An Integrated Shield Plan with all the upgrades – $1150 (a portion of that is actually payable by Medisave)

A 200k Personal Accident Cover Plan – $250

Disability Income Insurance (50% income replacement) – $150

An Early Stage Critical Illness Plan (50k) – $800

 

The grand total: $3250. That’s 9% of his salary.

Could he spend less? For sure he could. Harry toyed with the idea of scrapping the Early Stage Critical illness, as it makes up a big portion of his expenditure. But he knows better than to do so after reading this.

He is 30 years old, with a long (albeit hypothetical) life ahead of him. And he sleeps so much better knowing he is safe from financial harm. You can’t place a price on sound sleep, can you?

Let’s meet our next example.

 

Theoretical Terry

 

Theoretical Terry is 20 years older than Harry. At age 50, Terry earns a monthly income of 10,000 which translates to 120k every year. Unlike Harry, Terry has a child to raise but has a wife to help share in his financial burden. What would Terry’s Insurance needs look like?

A fully upgraded Medishield Plan
500k of Death Cover
500k of Total and Permanent Disability Cover
500k of Critical Illness cover
500k of Personal Accident Cover
60k of Disability Insurance Income
100k of Early Stage Critical Illness Cover

 

>> Terry used our Discover Engine here to calculate his needs <<

 

Terry acknowledges that with these covers in these amounts, he and his family is well positioned to ride out any financial crisis that might befall him.

 

At what cost?

 

A 500k Sum Assured Term Plan with Critical Illness Cover – $6000

An Integrated Shield Plan with all the upgrades – $2600 (a portion of that is actually payable by Medisave)

A 500k Personal Accident Cover Plan – $700

Disability Income Insurance – $1700 (Terry is way older than Harry, that’s why he has to pay a lot more)

A standalone Early Stage Critical Illness Plan (100k) – $4600

 

The grand total: $15,600. That’s 13% of his salary.

Terry knows that if he so chose, he could actually opt to replace his Term Plan with a Whole Life Plan, thus potentially giving him cash value in the future, though it may cost him more in the meantime.

One final example to go.

 

Imaginary Ivan

 

Imaginary Ivan is quite similar to Harry. He earns the same monthly amount as Harry (3k), and has (wisely) chosen to remain single and does not have any financial dependents. Only that Imaginary Ivan is 50 years old. As you may already expect, his coverage needs will look mighty similar to that of Harry’s.

A fully upgraded Medishield Plan
200k of Critical Illness Cover
200k of Personal Accident Cover
20k of Disability Insurance Income
50k of Early Stage Critical Illness Cover

With the age difference, how much will the same plans cost?

 

A 200k Sum Assured Term Plan (For the Critical Illness cover, but it also comes with Death and Total Permanent Disability Cover) – $2400

An Integrated Shield Plan with all the upgrades – $2600 (a portion of that is actually payable by Medisave)

A 200k Personal Accident Cover Plan – $250

Disability Income Insurance – $600

A standalone Early Stage Critical Illness Plan (50k) – $2300

 

The grand total: $8,150. That’s 23% of his salary! Ivan balks at the cost. It leaves him so little in the way of discretionary spending. He wants to celebrate Christmas in Japan, not Johor.

Then it dawns on him. Since Early Stage CI is so costly for his age, he ditches it all together. Why, he is fully covered for Hospitalization bills (his Shield Plan takes care of that) and his Disability Income Insurance replaces a portion of lost income in event of illness or accident. These 2 covers work in tandem to justify ditching Early Stage CI.

 

His new total: $5,850. A more acceptable 16% of his salary. Ivan could reduce it further by selecting cheaper plans, but he figures it is not worth the hassle, and suddenly remembers that a big portion of his Shield Plan is payable by Medisave.

He starts planning for Hokkaido.

 

Elegance Delivered

 

Much like trying to answer Life’s greatest questions, perhaps this is one that may never cease to be debated upon. I’ve heard ridiculous lowball figures like 2-3% from so-called “experts” who have no idea about Insurance costs (or Insurance for that matter), and up to 25-30% from overly enthusiastic Insurance Agents.

I think I’ve sufficiently illustrated that 7% – 15% fits a sizable swath of the population that lies somewhere in between Harry, Terry, and Ivan. It is the spending sweet spot that takes care of most, if not all, of your insurance requirements without undue sacrifice.

If you want to spend less than 7%, for sure you could cut back on certain types of covers. If you rather spend more than 15%, you could always opt for plans with savings or cash value components. Even complement your portfolio with endowment plans.

 

So what then is the ultimate answer?

 

Quite simply, and quite elegantly, it is whatever you want it to be.

It depends.

On you.

 

Adam Douglas would approve.

www.ClearlySurely.com aims to eradicate the knowledge gap between consumers and Life Insurance. Our Vision is that one day, every Man, Woman, and Child will be properly insured.

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