How to avoid over-insurance

Mr Tan,

Can you give some tips on how to avoid over-insurance? How much is adequate? How much is excessive?

REPLY:

You have to distinguish between the following:

* insurance - to protect against loss of earnings or to pay for expenses
* investment - to get an attractive return on your savings

If it is for insurance only, you should spend not more than 2% of your income. If you annual income is $40,000, you should spend not more than $800 to cover for the insurance of your life, medical expenses and your home and for your family members. (You may have to pay more, if you wish to insure your car).

If you buy insurance as a form of investment, you must look at the return. For long term investment, you must aim for a return of at least 4%.

If you are paying 10% of your earnings as insurance premium (and many people are), and you get a return of les than 2% per annum on your insurance policy, then you are getting a poor deal.

This is why I advise to buy term and invest the difference. Read this FAQ:

http://www.tankinlian.com/faq/fptips.html