You’ve heard the spiel: having insurance means having protection, and everybody needs protection!
But that’s not always true.
Some types, like medical insurance, are extremely important. But others are not for everyone. You need to know which apply to you, or else you’d be paying for coverage you don’t need or end up over-insured.
To get started, here’s how to tell if you need life insurance.
What is life insurance?
When you take out a life insurance policy, you’ll pay your insurance company a set amount of money (known as a premium) on a fixed schedule (monthly, quarterly or annually). In exchange, the insurance company will give you a lump-sum payment if you pass away or experience Total Permanent Disability (TPD). This gives the people who rely on you a financial buffer if you are gone – or in the case of TPD, if you are still around but no longer able to work for income.
Some types of life insurance, such as whole-life insurance or investment-linked policies (ILP) allow you to accumulate a cash value. This means that part of your premiums will go to building up savings or investments that you can withdraw during your policy term or when your policy expires. These policies tend to have higher premiums.
Other types of insurance, like term insurance, don’t have any cash value. These policies generally have comparatively lower premiums.
How do you know if you need life insurance?
Generally, the main deciding factor is whether there are people who depend on you financially. A life insurance payout isn’t protection for you, it’s a safety net for your family.
Here are a few situations where you may want to consider getting life insurance:
1. Your spouse depends on your income
A life insurance payout can give your spouse a financial buffer if you are no longer around or unable to work. It could help your spouse with funeral costs, day-to-day living expenses, mortgage or rent, or give them some financial breathing space before they get back up on their feet. This is especially true if you and your spouse rely on your income contribution to live a certain lifestyle, or if they do not have their own income.
2. You have children
Children are expensive. The cost of having a baby in the first year alone can go up to RM40,000 in the Klang Valley, and you’ll need to cover their living expenses until they’re financially independent. This could also include tertiary education, which costs a small fortune. Public university undergraduate degrees in Malaysia can cost up to RM15,700, while those at private universities can cost up to RM400,000. A life insurance payout can help cover some of these expenses in your absence.
3. You’re a stay-at-home parent
Your family may not depend on you financially, but just because you’re not earning a salary doesn’t mean your work has no monetary value. If you’re responsible for most of the domestic duties at home, you may want to consider getting a life insurance policy.
Think about all that you do for your family – childcare, transportation, laundry, cooking, cleaning. If you aren’t around to help with these important tasks, your spouse may have to engage with hired help. Hiring a live-in domestic helper can cost up to RM19,400 in the first year, while hiring a part-time cleaner can cost up to RM33 per hour.
4. You’re single, but you financially support your relatives
You may not need life insurance if you’re single and don’t have anyone who financially depends on you. But you may need coverage if you financially support your parents, siblings or other relatives.
If you support aging relatives, it’s important to consider increasing medical costs. A common procedure like a coronary bypass surgery can cost between RM3,000 to RM5,000 in a government hospital like University of Malaya Medical Centre (UMMC). These costs are increasing every year – Malaysia’s forecast medical inflation this year is 16%, one of the highest in the ASEAN region. This is where a life insurance payout could be useful, as your relatives may no longer be eligible for medical coverage that could cover these costs.
5. You have a lot of debt
If you pass away, your assets will be used to pay off your outstanding debts (such as personal loans, business loans, credit card debt, etc.). The remaining assets will be passed to your beneficiaries. Unfortunately, if you have a lot of debt, this could mean that your beneficiaries may receive a small inheritance. If your assets are not enough to cover your debts, your beneficiaries won’t inherit your debts, but they won’t inherit any assets, either.
There’s also an exception to the debt-cannot-be-inherited rule – if your spouse or family member has co-signed a loan with you or acted as a guarantor, they’ll need to repay the rest of your debts in your absence.
A life insurance payout can help offset this debt. While the best way to deal with high debt is to optimise your budget and pay it off, having insurance coverage in the meantime can give some peace of mind that your dependents won’t have to shoulder your debt or receive little to no inheritance.
If you’ve realised that you need life insurance, then it’s time to figure out how much coverage you need. Doing a capital needs analysis may be useful – this means taking stock of how much money your family or dependents may need in the event of your absence.
For example, if you have a 12-year-old child whom you expect to be financially independent by 22, you’ll need to calculate the cost of covering 10 years of expenses, including the cost of tertiary education. Let’s say you’ll need RM500,000, but you only have RM200,000 worth of assets. This leaves you with a RM300,000 gap, which you can close with life insurance coverage. Then consider what type of life insurance policy you need – this could be a term life insurance, whole life insurance or an investment-linked policy.
On the other hand, if you’ve read through this article and decided that you don’t have any dependents that need your life insured, that’s okay – you shouldn’t have to spend money on coverage that you don’t need. Just make sure that you have adequate coverage in other areas, such as medical or critical illness.