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How can you determine your insurance requirements for better financial risk management?

We often encounter young members of the workforce looking to embark on their financial planning journey with a simple life insurance coverage. This move should be lauded as it makes a lot of sense to play defense before offense, so to speak. To kick start the conversation, the question of affordability will inadvertently crop up – how much can you afford to pay? While this is a practical approach for young career starters, is there a more optimal way to determine your insurance needs for better financial risk management?

Before sharing some thoughts on risk mitigation needs that should be addressed by leveraging on insurance tools, perhaps it is best that I briefly touch on the types of life insurance coverage that individuals can consider.

The most basic is to address concerns in the event of death. The idea is that should financial dependents and family members face a premature or untimely departure of a main breadwinner, there will be a financial payout to help the next of kin recover from this setback by ensuring that living expenses and financial commitments can continue to be met with minimal disruptions for an extended period thereafter.

Related to this is the need to provide financial relief if the breadwinner is still alive but no longer able to generate income due to a total and permanent disability (TPD).

In this scenario, funding is required to replace the revenue of the income earner while also considering any additional living expenses that can arise due to the disability.

The third area is for critical illness (CI) needs where a lump sum is paid to the insured if there is a diagnosis of a covered serious illness. This payment can be used to fund non-hospitalisation related medical expenses as well as rising living expenses to aid a faster recovery.

It is no secret that medical inflation is rising rapidly. The escalating medical costs and the fact that life expectancy is prolonging means that it is more important now than ever to have our own hospitalisation & surgical (H&S) coverage (also known as medical card). Lastly, we are also exposed to the risk of all forms of accidents that might partially incapacitate us for a short period or permanently. Personal accident (PA) coverage provides payment for accidental related risks.

Having an appreciation of these five types of coverage will enable us to address our personal risk management need through insurance planning more comprehensively. However, as alluded to earlier, trying to address these areas based on affordability alone might give one a false sense of having effective risk mitigation in place.

So how then should one go about calculating the more accurate amount of insurance coverage for the respective funding needs?

1. Family Income

Family income refers to the amount of money required to provide sufficient levels of funds to surviving financial dependents, so long as they remain financially reliant on the breadwinner. This will need to cover expenses such as living expenses for the whole family including dependent parents (ideally until the youngest child reaches the age of 25 and for nonworking spouse for their remaining life expectancy), education fees and related costs for minor children up till tertiary education and insurance premiums for family members.

It can include funeral expenses and estate administration costs of the deceased also. The sum of these costs will give you a more precise indication of the amount required for death insurance coverage.

2. Income Replacement

This refers to the need for funding if one is no longer able to work due to TPD and is calculated based on how much expenses are incurred in a year for normal living expenses. In the ideal scenario, the calculation should be from now till one’s life expectancy. However, this could be a tall order for most people, particularly young employees, as such a simple guideline is that TPD coverage should amount to at least five years of income or until one’s retirement age (assuming that one is able to fund retirement expenses separately).

3. Debt Cancellation

For those who have outstanding loans, especially a mortgage on the family home, or any other loans, this may reduce the amount of money the family will receive and should be considered. Some clients will expect investment properties to be sold while others would prefer to transfer the assets to their loved ones free from encumbrance.

As such, depending on your wishes, you should consider the loan cancellation needs to ensure that your estate has sufficient funds to pay off these loans as well as providing the required funding for the family. You have the option to self-insure (if there are sufficient assets to settle the loan) or transfer that risk to the insurance company. The sum assured needed can be provided for utilising potentially cheaper products such as a term insurance policy over the outstanding loan period.

4. Critical Illness

If you are diagnosed with CI, you may need to stop work temporarily to undergo the necessary treatment and take a break to have a successful recovery. If you need to cover your living expenses during the recovery period due to concerns over non-covered medical expenses or higher cost of living, then CI funding will help to defray these expenses. To ensure that you are not over-paying in premiums for this need, you can use the rule of thumb to providea sum assured of between 3-5 years of your current annual income.

5. Medical Expenses

As mentioned earlier, medical costs particularly for private hospitalisation needs is rising. While one can depend on public hospitals for treatment, it is better to have alternatives via the private medical route. We do have some clients who work with multinational companies providing comprehensive medical card coverage and question the need for their own medical card.

However, our advice is always to obtain your own medical card early so that the premiums are lower while you are in better health. Purchasing one only upon retirement may make you ineligible (due to pre-existing medical conditions) or having to pay a hefty premium due to your age or loading due to medical factors. Ideally one should have a medical card providing a room and board of at least RM200 with an annual medical limit of minimum RM1 million and no lifetime limit.

6. Personal Accident

Lastly, one should also have coverage for the risk of accidental injury, TPD or accidental death which may not be covered by the above policies. It does not help that the statistics do not favour the young – a higher percentage of youths meet with accidents resulting in the inability to carry on employment, permanent disablement or even death.

One should not only rely on payment from SOCSO for accidental claims as there are terms and conditions to be met. Often forgotten (as they are rarely sold due to low premium costs), PA policies are generally very cost effective especially with the attractive renewal bonus offered. Similarly, you can use the guideline of providing a sum assured of between 3-5 years of your current annual income for this need as well.

In summary, the path to having the right insurance coverage is indeed a balancing act of sorts. Too much, and you might make it more daunting to save and invest to achieve your desired financial goals. If you are underinsured, then you or your dependents might be in a financial quandary. So good on you for getting the ball rolling by purchasing insurance policies based on what you can currently afford as a
fresh member of the workforce, but do recognise that you will need to review your needs over time to ensure that you have an effective financial risk management plan in place.

About the author

Felix Neoh CFP CERT TM is the director of financial planning at Finwealth Management Sdn Bhd and can be contacted at enquiry@finwealth.com.my.

We at Smart Investor and Finwealth is committed to help you better manage your financials. Get a free consultation from an expert by filling in your details here: https://www.smartinvestor.com.my/SIxFinwealth

We speak with financial planners to get their advice on what people at different stages in life need for insurance coverage.

If you think about your circle of family and friends, there is a good chance that you will know someone that works in insurance. But for a product that is seemingly ubiquitous, the numbers paint a different story.

In 2020, Life Insurance Association of Malaysia (LIAM) president Loh Guat Lan revealed that almost half of the country does not have life insurance, while the National Health and Morbidity Study conducted in 2019 by the Ministry of Health (MOH) showed that only 54% of Malaysians have health insurance coverage.

Apart from reasons of affordability, many do not have insurance simply because they do not see a need. However, this can be a dangerous mindset to have as it does not offer a safety net in the event of  unfortunate accidents or peril. After all, it is likely that anyone will go through life and come out completely unscathed.

Here is what three financial planners have to say about the types of insurance you should be looking to get:

What Insurance Should You Get In Your 20s?

This is the time when most people are settling into life as working professionals, often in their first job. Earning income for the first time can be a thrill, and with disposable income to spend on clothing, dining, hobbies and more, it is no wonder that insurance can often be the last thing on their minds.

“I often tell younger clients and friends that the first insurance one should get is a health insurance, or commonly known as the medical card,” says Marshall Wong, a licensed financial planner at FA Advisory.

“A health insurance covers the hospitalisation bill that may cost more than one’s annual income.”

He adds that personal accident insurance is the second most important insurance that young working adults should seek out, given that traffic accidents are the fourth-highest cause of death in the country according to the Department of Statistics Malaysia.

Although a life insurance policy will usually cover accidental death, he notes that the premium for such coverage is “a lot higher” than insurance for personal accidents.

“Young adults may not be able to afford an adequate coverage,” he notes, with this being the reason why personal accident insurance is important.

Although having insurance is always important, Wong acknowledges that many of today’s youths may be of the mindset that it is unnecessary given their age. He warns that a lack of insurance could potentially lead to financial ruin if an unfortunate event occurs.

“Young adults need to know that not all insurance is expensive, and not all insurance agents are out there to take their money,” he advises.

“There are plenty of affordable insurance that may be suitable for them. If you cannot afford an investment-linked medical card, you may opt for a stand-alone medical card. The standalone medical card may not have as many features as an investment-linked counterpart, however, it may cover the basic necessities, and it may cost 50% lesser!”

When quizzed about niche forms of insurance, Wong says that it is more important for young adults to “stay nimble” rather than opting for unnecessary protection.

“Hire a fee based financial planner to go through your financial position as the exit cost of some insurance products can be very high,” he suggests.

What Insurance Should You Get In Your 30s?

By this time, most people should be well-established at work and have built up a solid base in terms of finances. This is the period in which many start taking on more financial responsibilities and assets. So where does insurance factor into this?

“In your 30s, your financial status is likely to be more stable,” says Pang Wan Khim, a licensed financial planner with VKA Wealth Planners.

She recommends a life insurance policy for those who do not have one at this age, as most people will have plenty of bills and commitments to pay down, such as cars, houses, and even marriage.

“With many financial responsibilities, and good health likely still on your side, you should get a life insurance policy to protect your loved ones’ future from life’s uncertainties,” she says.

Such policies pay out a lump sum of money to beneficiaries in the event of premature death. The idea is that death benefit should be sufficient to replace future income loss especially if you have a spouse who solely relies on your income. The total amount will cover the expenses and obligations outstanding such as funeral costs, medical expenses, debts, children education or living cost for your loved one.

“This gives your family financial continuity so they do not have to struggle and have more time to structure the financial status or fill the financial gaps,” explains Pang.

With most people in this age bracket acquiring assets like property, vehicles, and businesses, the upfront cost usually takes decades to accumulate. This is where financial assistance from banks come into play, with loans usually taken to acquire these assets.

“But as a borrower, if you pass away, all the debts will still need to be repaid in full by your estate,” she warns.

“Life coverage plays a crucial role in this situation and most people tend to overlook this when planning.”

She also believes critical illness insurance is very important as it helps to cover insufficient limits on hospitalisation plans as well as costs not covered on such plans, as well as non-medical costs like nurse care, transportation expenses, income replacement, medical equipment or even time off while recovering.

Although she is recommending guidelines for those in their 30s, Pang believes that insurance should be bought as soon as you can afford it, regardless of age. It goes without saying that the best time to buy is also while you remain healthy, but ultimately, these are just best-case scenarios as life is not the same for everyone.

“My general recommendations will not work for everyone because our situations are unique and financial statuses are different,” she observes.

Pang also recommends investment-linked insurance because most people tend to be busy with work and family, and it provides flexibility and peace of mind. With the cost of insurance generally increasing, she suggests using some of the investment proceeds to cover this increase in later years.

“The design of this product does offer a structure that helps us to gradually accumulate value which may be used to help us fund for the future when charges are generally higher,” she adds.

“However, as this is still an insurance product, the main focus should still be about protection, not growing your wealth.”

What Insurance Should You Get In Your 40s?

Individuals in this age group should be firmly at their peak in life. Many will have assumed positions of seniority at their jobs or built a family. With all these added dependents, not having insurance by this time can often be concerning, with premiums usually higher due to the advanced age of potential buyers. So, have you missed the boat by the time you hit your 40s?

Nicholas Wong, a certified financial planner with IPP Financial Planning Group, believes that it is “never too late to get insurance”, but concedes that it is advisable to start getting insurance at an early age.

“It is always recommended to get coverage as soon as possible if one can afford it as one can only obtain insurance when healthy,” he shares.

The higher risk of developing illnesses or other serious health conditions means that for individuals in their 40s, it is now or never when it comes to buying insurance, especially if they are still healthy. Those with pre-existing conditions may find it harder to purchase insurance coverage says Wong.

“Your plan might come with exclusions or premium loading, which is paying more due to illnesses such as hypertension, for example. If one has diabetes, one generally can no longer purchase medical or critical illness coverage.”

“Thus, it is better to get a plan when you are younger as the premiums are lower and there is less risk of having exclusions or insurance coverage being denied,” he concludes.

For middle-aged people looking to get insurance for the first time, there is still time as alluded to earlier.

“For insurances, we always look at the needs of the individual and have to select the appropriate type of coverage,” says Wong.

“For example, if they have dependents such as young children or old parents, life insurance would be a need unless they have surplus liquid cash around.”

Wong, who formerly worked in insurance, recommends critical illness and disability insurance as a safety net against a loss of income arising from unfortunate events. This is because those in their 40s are likely to be at the peak of their career in terms of earnings and income replacement coverage will help to mitigate against unfortunate life-changing events.

“For critical illness cover, the recommendation is three to five times of the annual income or annual expenses,” he says.

“This means that while one is recovering from a critical illness, they would be able to take three to five years off work and not worry about expenses or dipping into their savings.”

Wong also recommends a 20-year term plan for those in their 40s as it is both affordable and provides large amounts of cover.

“A 20-year term plan with RM500,000 for life and total and permanent disability cover with RM100,000 critical illness cover can start from approximately RM200 a month,” he continues, noting that premiums may differ depending on plan benefits and type.

Wong suggests that one should usually budget 5-10% of total income for insurance payments, with this amount set aside to “protect or guarantee the remaining 90-95%” in the event of death, disability, critical illness or hospitalisation.

“Medical insurance which gives access to private healthcare is also something one can consider as it gives you more options when it comes to medical treatments as not everything is covered by our government hospitals,” he adds.

Insurance As Wealth Management

While many may look at insurance purely from a protection standpoint, it may also help to picture it as a mechanism to manage or preserve your wealth. Here are four ways which Angie Ng suggests insurance can be used for this purpose:

1. Wealth creation
“Part of the premium paid each month can go into cash value and there are also some products available that will help people who prefer very conservative savings instruments to build their wealth slowly and steadily.”

2. Debt cancellation
“There are insurance policies from which the proceeds can settle outstanding loans on assets like houses, cars, businesses and others in the event that they are unable to repay the balance.”

3. Wealth protection
“When risk is incurred, medical treatment, critical illnesses or total permanent disability occurs, insurance can protect their wealth as the treatment and insurance proceed can ease their financial burdens without
touching their hard-earned money.”

4. Wealth distribution
“In the event of an untimely death, life insurance policies can help to settle a person’s outstanding taxes, estate administration fees, and most importantly, leaving a legacy behind for their loved ones.”

In addition, insurance can also be used to mitigate the risk of natural disasters, no matter how rare or unexpected they may be. According to the Department of Statistics, the 2021 floods caused total losses of RM6.1 billion, with RM1.6 billion of damage to residential properties, RM1 billion to vehicles, RM900 million to the manufacturing sector, RM500 million to business premises, RM90.6 million to agriculture, and RM2 billion to public assets and infrastructure.

“If you are exposed to risk, for example, flooding in low lying areas or landslides in high hill areas, it is wise to include additional peril in your insurance policy to cover for natural disasters or other events,” says Ng.