For a person with a family, the possible financial lost that will cause hardship to the family will be:
- Lost of income due to disability;
- High medical bill due to hospitalization;
- High expenses due to critical illnesses; and
- Lost of income due to death
The following is how we can estimate the “sum assured” for each type of insured event:
- For lost of income due to disability, the sum assured desired is the existing gross salary. However, the insurer will only be willing to insure at most 75% of one’s gross salary subjected to a limit. Thus, it is not possible to insured 100% of the salary. Such an insurance is called Disability Income Insurance. Avoid Disability Income Insurance plan that exclude pre-existing illnesses by default.
- For medical bill due to hospitalization, you have to decide which hospital you will be staying upon admission to a hospital. Since nobody plans to go to hospital, it is usually recommended to assume that you may stay in a private hospital. For practical purpose, most people will consult their GP for minor ailments which if becomes major, a private specialist will be recommended for follow-up. If the private specialist recommends admission, it will almost be certain be a private hospital. In order to be admitted to a government restructured hospital, it is an open secret that people will visit a polyclinic and ask to be referred to government hospital. The latter is troublesome and time consuming and only appropriate for non-urgent cases. For maximum flexible, assume the most “expensive” case which is the private hospital.
- To obtain a lump sum payment to meet high expenditure upon critical illness, a whole life policy is more appropriate. Such a policy covers for life but these days it is possible to get a whole life policy which its premium is limited in years. These days, it is common to have at least $200,000 in critical illness cover.
- For lost of income due to death, it is more appropriate to consider term insurance which provides high cover at low cost because the coverage term is temporarily only. The amount required is based on lost of income x period of years. For example if the annual income was $50,000 and there are dependents for the next 20 years, the sum assured (without taking account of inflation) is 50000x20=$1 million.
The following is a picture of an ideal insurance cover for such a person:
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