Risk management – Are you over OR under insured?

Are you over insured or are you under insured?

You are the judge whether if you are adequately covered. There are two methods which you may need to consider. Which method depends on the angle where your priorities lie? You may be concerned from the angle of

·         Annual Expenditure (Ex) or

·         Annual income (In).

Your financial advisor will be able to assist. However, if you do not have one, you may consider the following equation

Potential loss = ((Ex) or (In)) * time horizon * inflation

You may use the Future Value (FV) formula from Microsoft Excel to generate the result.

So for e.g. your monthly expenses is S$ 1,000 per month or S$ 18,000 per annum, potential loss to cover your dependants for a time horizon is 10 years, at an inflation rate of 4.5% (Apr 2011), the potential loss works out to be S$ 231,000 thereabouts.

Taking into consideration all your life policies (for e.g. S$ 100,000) and DPS (for e.g. S$ 46,000), you are then, classified being under insured by S$ 85,000.

You can use the same formula for potential loss of income, for Total & Permanent Disability (TPD) or upon diagnosis of major illness. However, not as simple as it seems, the

Potential loss depends if you are

·         A fresh graduate,

·         Gender: Male of Female

·         Stage of financial planning: Single, Married, Married with child(ren), Pre-Retirement, Retirement and Post Retirement, etc

·         Expenditure may include household, child support, parent support, income tax, vacation, etc

·         Time horizon depends on your child, spouse and/or care giving to your parents, etc

In other words, you decide on the input to the equation. And how and what we will do is to generate the equation, and hence the status: surplus or deficit. In such a way, where you decide on the inputs and assumptions, there’s no way, the figures can be inflated or otherwise. And the result, you will notice if you’re under insured or otherwise.

Based on the above, a risk management is identified and put into plan. However, there may be situations where the public may/will buy from their trigger happy insurance salesman (without a probable justification from a financial planning point of view). The end result is NOT that you will be over insured BUT buying the wrong things and putting up for display! Unless you are CASH rich, you may find yourself in a situation that you may not have the funds for seeking a risk management solution at a later stage. As such, this is ONE of the considerations between choosing Term or Whole Life?

Note: a word of caution! While you seek lawyers for legal matters, medical doctors for medical problems, please seek a professional, certified experienced financial planner for your risk management needs. The above is just a SIMPLE guidance that leads to a ball park figure.