Are you over-insured or under-insured?

Updated 14 Dec 2017 – By Loanstreet


We often think to ourselves questions like these; ‘Which type of life insurance policy suits me most?’ ‘How much life insurance coverage do I need?’ Well, questions like these are very difficult and tricky to answer as it is different for everyone.
 

Life insurance plays an important role in our life by providing protection and it also guarantees that our immediate family will have an income should the worst happen to us. The future is uncertain and nobody knows what might happen tomorrow. As the saying goes, prevention is better than cure.

If you do not have a life insurance right now, you can buy online within 10 minutes at www.uforlife.com.my.

Are you over-insured?

To know if you are over-insured, let us demonstrate an example. Let’s say you want a protection term for 30 years, and your monthly income is RM 5,000. You are about to purchase a life insurance that pays RM 1,800,000 to substitute the loss of income.

This shows us that you are over-insuring yourself because this amount of cover is absurdly high and also unnecessary. Why? This is due to the 3 reasons below:

  1. Your family will most likely change to a more conservative spending approach after you are deceased. They will probably lessen the times eating out or going shopping for a period of time. Hence, they will not need such a huge amount of insurance to cover your income entirely.

  2. Your income does not go to your household spending and paying off mortgage only. You use a part of your income for yourself too, thus after you are deceased that part of money gets to be saved.

  3. A part of your income might go to investment, so it is unnecessary to sustain your family’s expenses. Moreover, if you have other investments then you may not even need a very high coverage as the investment returns can be used to help your family’s expenses.

In reality, it is always better to estimate your family’s household spending by deducting any income your spouse is earning to come up with a more accurate prediction of how much extra income your family will need.

Are you under-insured?

Imagine if you are in a difficult situation financially but you also know the importance of life insurance. You have calculated that you and your family’s monthly spend and decide to buy just the right amount to cover this monthly spending amount.

What you must keep in mind is that when your children grow up their education fees may rise; inflation might reduce the value of your death benefits; you also might have other loan payable active at that moment of time.

It is difficult to predict what will happen in the future, hence the best way to prevent yourself from being underinsured is that you review your insurance policy every few years to make sure it provides you the adequate level of protection.

Reasons people get over-insured or under-insured

Although you have carefully estimated the insurance coverage you require, you are still not completely safe from being over-insured or under-insured. This is due to the complicated nature of life insurance that leaves you confused. Let’s take a look at some common reasons people gets confused and prevent them.

  1. Complexed policies

    If you were to purchase something you do not understand, then you will have a higher chance of being underinsured. This is because life insurance that comes with medical card or investments usually have a very low death coverage. Hence, if you already have your own investments then you can choose a basic life insurance which you can understand perfectly and that only provides death benefits. U  For Life is an online insurance company that is excellent for its simplicity as it offers basic life insurance and has instant quotation available.

  2. Lack of Planning

    There are some people who buy life insurance for mortgage loan only. If you are still young and have recently bought a property, it is more likely that you will have another property in the future. If you purchase a term life insurance just to ensure that your family will be able to pay off your mortgage, then

    1. You might be underinsured because if you buy more property in the near future, your death benefit might not be able to cover the mortgage loan amount.

    2. If the policy expires and you still wish to be insured, premiums will be higher and chances to be rejected is greater because of your age and health conditions.

    But, if you had bought a Mortgage Level Term Assurance (MLTA) instead, you can switch your policy over to a new property without needing to prove your health or age again.

  3. Perspective about life insurance being costly

    Many people think that life insurance is costly and choose to avoid life insurance with that perspective in mind. However, that is not true because certain life insurance policy is affordable.

    Term life insurance is usually cheaper than traditional whole life insurance because it only protects you for a certain duration and your policy expires once the duration runs out. However, if you are looking for an even cheaper option, you can opt for U For Life. It is an e-policy with step up premium, ensuring that you only pay affordable fees needed to provide protection for your current age without having to pay in advance for old ages. For more information regarding step up premium, you can read about it here.

  4. Changes in Life Stages

    People move on to different life stages constantly. Your life insurance policy should move accordingly as well because you require different protection at different stages in your life. Since we are not able to predict the future, therefore to ensure that your life insurance policy is consistent with your current life stage is by constant reviews. For more information about reviewing your life insurance, please refer to our “What to look for in your next insurance review?” for more tips on how to review life insurance policy.

Conclusion

For younger readers, it might be harder to identify how much insurance you need right now. Hence, our answer to them is to stick with something simple, easy to understand and constantly review your insurance needs. As for people who would like to plan even further, it is up to you to go for a more extensive or basic policy. At the end of the day, every policy is cheap or expensive for a reason, examine their features, think of your situation and you can make the best buying decision easily!

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