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Investor psychology and beating our fears.

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How much term life insurance should a fresh graduate have?

Sunday, August 31, 2014

I don't know if it is a trait of Asian families but it seems that there are certain topics related to money which are taboo. 

I know my family generally don't like to talk about death and insurance, for example. Maybe, it is considered inauspicious but I don't care. I will talk if I think it is necessary because I do care.


When a reader sent me an email with regards to one of my blog posts about what I think young graduates might want to do to get their personal finances in order before thinking about investing money in the stock market, I said the same thing.

As we grow older, our parents grow older too. They will retire one day and might depend on us for financial support. Buying insurance on our life is for our dependents. So, it is important to talk to our parents about insurance and what we are doing for them if they should be dependent on us. They have to know.

In that blog post the reader referred to, point number 1 was:

1. Buy a term policy. Very important if we have parents or other dependents to care for. How much should the coverage be? It is up to you but I feel that $500K is probably more than adequate for most. (See related post number 1 at the end of this blog post for the full article.)

He wondered why I thought $500,000 was probably an adequate amount for a start? There is a very simple reason.


In case the insured (i.e. the fresh graduate) should meet with an untimely demise, each parent would get $250,000. 

If the parents were financially prudent, they would use the money to buy an annuity each. There could be a 5 year or 10 year accumulation period but if the annuities were worth their salt, they could provide a monthly income of $2,000 or more for each parent. 

Sounds good?

This is how that $500,000 paid out by the term life policy should be utilised, in my opinion.

Unfortunately, not everyone is financially prudent. $500,000 may look like a big amount of money but it could disappear very quickly in the hands of the less prudent. 

Then, there are people who are at the other extreme who might just put all the money in a fixed deposit or a few which is better than squandering away the money but it is still far from ideal.



So, although possibly losing their child is not something parents want to think or talk about, we have to talk to them about it at least once and tell them what they should do with the money paid out by the insurance company if the bad thing should happen. 

I believe that talking about it will ultimately give everyone a peace of mind.

The sooner we do it, the better.

Related posts:
1. Take steps towards financial security.
2. Financial freedom is a family affair.
3. An annuity proposal: A case study.
4. Free medical insurance in our old age.
5. What is our attitude towards having children?

7 comments:

Singapore Man of Leisure said...

AK,

I put the beneficiary to one of my sibling.

Dad would probably spend the "windfall" on wine, women, and song. I know because I am the child that take after him the most.

And I don't want to burden mom as she will be bombarded with "well-intentioned advice on how to "invest" from long lost relatives.

Since my surviving siblings will be the ones taking care of mom and dad, then appointing the one with "leadership" is my way to go.

Investment knowledge optional.

Willingness to take care and love for mom and dad more paramount :)

Zi Rong said...

$500k seems about right.

20 years ago, my parents bought policies with coverage of $75-100k and they felt was already a large sum. But in today's context, the amount if really quite small. So if $500k seems very large now, it'll be just only sufficient in 20 years time.

AK71 said...

Hi SMOL,

Sounds like a plan. ;)

I would suggest that you talk to this sibling with the leadership qualities about how the money should be used in case of your untimely demise. Something could happen to him or her and the money that was meant to care for your parents could be misappropriated by others. Heavens forbid, of course.

Since your sibling would basically be a proxy beneficiary, let him or her know how the money could be used to ensure a regular income stream for your parents.

You still need to talk about this but just not with your parents. ;)

AK71 said...

Hi Zi Rong,

If nothing is done to the money to make sure it grows, it is definitely going to shrink in value and run out quite quickly. This is why I suggest that the money be used to buy annuities which will guarantee a regular income for life. :)

hjteo said...

Good one AK,
If they are NS man, the SAFRA term insurance or SAF Aviva term insurance has one of the lowest premiums. Didn't buy those till I was mid thirty's. Buy Term and invest the rest!

SMK said...

I agree with the post and all the comments except hjteo's.

generally, one should get as much coverage as early as, also as much as reasonably and medically possible, one can.

I say this because:

1. medical conditions such cholestrol and its like, being as early as late twenties. and many people out of spite for being classified separately or rejected by the insurance company, will not get the coverage.

2. like zi rong says, $100K is not a lot now. but it was, then. So $1m is a lot now, not so in 20 years time. as a general guide, currency devalues by 3.3 every 20 years for most of us reading this.

3. the savings from the delay, will be eroded by the exponential increase in costs/premiums for most insurance. Save a penny, lose a pound.

4. if you spend $500 a month now, you will spend $1500 a month 20 years on, give or take a couple $100. With kids, then you will spend....
your coverage needs will only increase over time.

there are probably a few more reasons but I am lazy to complete.. so have a fantastic sunday.

AK71 said...

Consumers can buy basic life insurance policies directly from insurance companies at customer service centres or websites, without going through financial advisers and incurring commissions, from Tuesday (Apr 7).

The Direct Purchase Insurance (DPI) initiative, which was implemented by the Monetary Authority of Singapore (MAS), comprises term life insurance products with total and permanent disability (TPD) cover; whole life insurance products with TPD cover; and optional critical illness rider attached to term life or whole life insurance products.

An online portal www.comparefirst.sg was also launched to allow consumers to compare insurance products on the market.


Source:
http://www.channelnewsasia.com/news/business/singapore/no-commission-insurance/1770096.html

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