Lately, I received a question on insurance as follows:
I have been hearing about spending 10% of our income to buy insurance. Thus, I would like to ask, ‘If my salary is RM 30,000 a month, does it make sense for me to pay RM 3,000 a month on insurance premiums?
Well, here is my take.
First, it is normal to be conscious of the amount of premiums we pay for our life and medical insurance, but not the benefits and total sum assured from them. I personally take a different approach for my own insurance policies. To me, I feel that my plans and policy benefits are more important than premiums.
For instance, two individuals can pay RM 1,000 a month in premiums, but could possibly have vastly different sums assured. One could have RM 100,000 in sum assured. The other could have RM 2,000,000 or even more in sum assured. This depends on their age and type of benefits they opt for when buying policies.
So, it is about the types and amount of coverage, not the premiums.
How Much Sum Assured Do We Need?
Personally, I think the amount is based on the value of the ‘asset’ to be insured.
For instance, if you have a car valued at RM 80,000, how much sum assured will you insure your car for?
RM 80,000, right?
Now, how about a house worth RM 800,000? How much will you insure it for?
Well, the answer is RM 800,000.
Okay, let’s say you are a businessman. Years ago, you had invested around RM 1 million into building a business. Today, your business earns around RM 1 million a year. Will you insure your business assets for RM 1 million?
Well, if you are a smart businessman, most likely you won’t.
Why? This is because you would value your business more than RM 1 million as it is already making RM 1 million a year. For instance, if the business is valued at 10x its current annual earnings, your business is worth RM 10 million. Hence, in your situation, you may insure your business assets at RM 10 million.
But, what if your business is valued at 20x its current annual earnings?
Then, you may insure your business assets at RM 20 million for that is its value.
So now, the question is, ‘What about human lives?’
How much do we value our own lives?
Well, while we cannot put a price tag on human lives, but financially speaking, I would say that our income potential is vastly different. So, I view each of us as a ‘business’ in assessing the amount of sum assured for my insurance policies.
From above, if one earns RM 30,000 a month (RM 360,000 a year), I believe the question now is, ‘How does he value his income potential if he is a business?’
Hence, if his valuation of himself is 10x his current annual income, then this guy could insure himself for RM 3.6 million.
But, if his valuation is 20x his current annual income, then the sum assured that he should insure himself is RM 7.2 million.
So, for ourselves, the question is, ‘How much multiples of annual income do we value ourselves?’ That would determine how much sum assured we need when it comes to purchasing life insurance policies.
But Then, Are Millions in Sum Assured Too Much?
Well, I think it depends on what matters to you more.
If your primary concern is on the premiums, then millions in sum assured is just way too much. But, if you are looking to build a legacy worth millions that could benefit your loved ones, your businesses, and your community, I would say that millions in sum assured would not be ‘too much’.
The issue lies with how big or how small is our current mindset.
But, Should I Buy a RM 5 Million Policy under 1 Insurance Policy?
Well, I didn’t do so.
Personally, I buy mine progressively every year, adding some RM 300,000 to RM 500,000 in sum assured for each policy. There is no need to grab a million dollar policy instantaneously if I could not afford to do so. I chose to pace myself and I worked towards building my million-ringgit estate on a slow and steady basis.
But, Isn’t Investing better than Buying Insurance?
Let’s say, I want to build a RM 5 million estate today.
Yes, I can invest. If I earn RM 30,000 a month and let’s say I can save RM 20,000 a month (RM 240,000 a year) for investments, the question is, ‘How long would it take for me to build a RM 5 million investment portfolio?’ Could it be 5 years? Or 10 years? Or perhaps, 15-20 years? The bottom line is this – It takes time.
Here, I’m not saying ‘Don’t Invest’ or ‘Investing is better than Insurance’.
But what if I say that I can take 5%-10% of RM 20,000 saved per month and buy life insurance that covers RM 5 million? Instantaneously, I would be assured RM 5 million in estates and still have at least RM 18,000 per month for investments.
Now, here is when things get better.
If I take RM 18,000 a month (RM 216,000 a year) to build a dividend portfolio in Malaysia and Singapore to earn a conservative dividend yield of 5% per year, I’ll earn RM 10,800 in dividends, starting in Year 2 of my investment activities. That could be equivalent to at least 50% of my insurance premiums.
If I continue to do this, I could have all my dividends to fund all of my premiums by Year 3-4. At that time, it is possible to have around RM 500,000-RM 1 million in stock portfolio and still have the RM 5 million in sum assured.
In total, your estates could be valued at RM 5+ million.
This allows you to start thinking of a possibility to raise your estate value from a total of RM 5+ million to maybe, RM 10 million.
So why not combine the two: investments + insurance in financial planning.
In short, I think most people may over-prioritize on insurance premiums and so, might have overlooked the purposes for getting them, which is to prepare sums for contingencies and leaving behind a meaningful legacy. If your focus is set on the sum assured, the amount you’ll insure yourself shall likely be different from another person who is merely cost-focused.
If you ask me, ‘Will I spend RM 3,000 a month on insurance, if I earn RM 30,000 a month?’
Highly likely, I would say yes.
So, is insurance just a cost or an expense to you?
Or, can insurance be included to build up your million-dollar estate?
That I’ll leave you to decide.
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