Term insurance - for family protection

Dear Mr. Tan,

You advised a person to have life insurance for 5 to 10 years of earnings. If I earn $50,000 a year, do I need $500,000 of life insurance? How much will it cost? Can I afford it?

REPLY

Assume that you have a young family and you are now 30 years old. If anything happens to you, you your family will need an income for the next 25 years (until the children are grown up). Let us assume that 60% of your income is set aside for the family expenses (i.e. 40% is for taxes, savings, and your personal expenses). Your family needs $30,000 yearly for the next 25 years.

Using a discount rate of 3%, the present value of the 25 year income stream is $538,000. This is 10 years of your income.

If you take a level term insurance for 25 years, you have to pay an annual premium of about $850 (male) or $475 (female). This are my indication of the fair premium rates. It represents less than 2% of your earings. You may be able to find an insurance company to offer a lower premium rate.  

You can set aside 10% to 15% of your earnings as savings. You can invest in a balanced fund comprising of bonds and equities. 

If you wish to pay a lower cost, you can buy a term insurance that reduces the sum assured gradually over the term. (As your children grows older, you will need less coverage to take care of their needs. Also, you savings would have increased each year). The cost of a decreasing term insurance is less than 50% of the level term insurance (indicative $425 for male, $240 for female).

I will be approaching a few insurance companies to offer attractive term insurance rates to members of FISCA (i.e. the financial services consumer association to be launched soon).