An Easy Way to Estimate Life Insurance Needs
May 20, 2023
Recently, we’ve been talking about investments, just like the opportunity in the bond market. And of course, it is also wise to remember that we must protect it.
Because the last thing I’d want for any investor is to be forced to sell their investments prematurely simply because of unexpected emergencies in life. So this is where insurance comes in.
It is essential that we (including our loved ones and even our assets) are protected from any unforeseen expenses. Having that peace of mind for the future will help us build a stronger financial foundation.
So through this article, my goal is to help you identify your basic life insurance needs and make sure that your finances are prepared appropriately. And to do that, we’ll start with a refresher on the purpose of life insurance.
The Purpose of Life Insurance
The purpose of life insurance is to ensure that if we were to suddenly pass away, all of our financial obligations would be covered and those we leave behind would be taken care of, at least in the financial sense.
Now, predicting what would happen after one’s death (especially when it’s unexpected) can be hard to imagine. And much harder is estimating how much exactly our loved ones would need if that were to happen.
That’s why we’ve come up with a simple way to quickly approximate these needs, and it goes by the acronym D.I.C.E.
The DICE Method
The DICE method refers to a letter signifying an important aspect that I recommend including in your coverage for life insurance.
- D is for Debts
This includes everything that you owe or have yet to pay for. Regardless of whether it’s personal loans, credit cards, motor and business loans, or a mortgage, add the total amount of your loans to your computation.
This is included to make sure that if something unexpected were to happen, all debts could be paid immediately, so it wouldn’t be a burden to the family we leave behind.
- I is for Income Replacement
Income replacement is the way we factor in how much our family will need in the event we are suddenly gone. Of course, as much as possible, we wouldn’t want the current lifestyle to be affected (even if it always will be). So, as the term implies, it aims to be the source of income for your dependents’ needs until they can provide for themselves.
To compute this, we multiply the annual expenses by the number of years that you’ll still need to support your dependents. Normally, this is based on the age of your youngest child, as they’ll likely be the ones that take the longest to support. But if you are supporting your parents or a non-earning spouse, then the computation would be based on them instead.
- C is for College Funding
College funding refers to, well… college fees. This is a category of its own simply because it is significant that it goes well beyond the normal lifestyle expenses not considered in the “Income Replacement” category.
To do this, we typically search for the tuition fees of the university to which you want to send your child. Then we factor in inflation, which ranges from 4-10% depending on the country, to estimate the total cost of college.
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E is for Estate Taxes
Finally, the last consideration that is crucial for high-net-worth individuals is the estate tax. To ensure that your heir/s will inherit your wealth and assets, calculating the possible taxes and including it in your coverage is a must.
While the estate laws are different in every country, a simple way to estimate this is to base it on your retirement target.
The retirement fund target is computed by dividing your annual income by 4%. This is because it assumes that once that amount is reached and it earns 4% per year, you could live perpetually off of its interest.
Now to estimate the estate taxes, we multiply the target retirement fund by 6%, which is the estate tax in the Philippines. Note that in Singapore, there is no estate tax.
After computing each, just add all the results to identify the suggested life coverage for you.
To understand this further, let’s provide an example below.
A Sample Computation
Kim, age 38, is married and has an 8-year-old son. They live in Singapore but have assets in the Philippines. Her current monthly income is S$12,000, and their monthly expense is S$8,000. Right now, she and her husband are hoping to send their son to SMU for college.
Focusing on Kim alone, this is how we’ll compute her basic life insurance needs using the DICE acronym.
1. Debts
- Kim has a loan of S$1,000,000 for their 2-bedroom apartment.
2. Income Replacement
- Annual expenses = S$8,000 multiplied by 12 = S$96,000
- Assuming Kim expects to support his son until he’s 24 years old, she’ll provide for 16 more years.
- Needed income = S$96,000 multiplied by 16 = S$1,536,000
3. College Funding
- SMU’s annual tuition fee is S$11,450. For a 4-year course, that’s S$45,800 in total.
- Kim’s son is expected to enter university when he’s 18 years old, which is in 10 years’ time.
- We will then increase this for inflation which is historically at 4% per year.
- The estimated tuition in 10 years time will be S$67,795.
4. Estate Taxes
- Annual income = S$12,000 multiplied by 12 = S$144,000
- Net worth = S$144,000 divided by 4% = S$3,600,000
- Possible estate taxes = S$3,600,000 multiplied by 6% = S$216,000
Adding all the results together,
- Debts: S$1,000,000
- Income Replacement: S$1,536,000
- College Funding: S$67,795
- Estate: S$216,000
The estimated amount of life insurance coverage Kim needs is S$2,819,795.
At the end of the day, it will depend on Kim’s budget and investment preferences as to how she wants to cover these potential financial risks. Overall, the DICE method is just a guide to quickly estimate how much coverage would fully protect her financially.
Summary
The purpose of life insurance is to ensure that if we were to suddenly pass away, all of our financial obligations would be covered and those we leave behind would be financially protected. The DICE Method then allows us to compute how much these risks are.
Once we have a baseline, it will then depend on the budget and investment preferences to determine which kind of insurance plan would be best for each individual client.
While the DICE method is just one way of computing, it is essential to remember the overall purpose of insurance, which is to help families achieve financial security and peace of mind.
Without knowing your numbers, you’ll never know what’s enough. And if you don’t know what’s enough, then there can be no peace of mind. This is why knowing your numbers is important.
And with this article, I hope it helps you move one step closer to achieving security and peace of mind in your finances.
Note: For clients, if you’ve recently had any major life events (like marriage, childbirth, relocations, etc.) that have happened in your life, let me know! This is so we can make sure that your insurance is updated according to your needs and goals.
Note #2: For individuals who want to make sure they’re adequately protected, don’t hesitate to reach out. We’ll ensure that you’ll be guided every step of the way and that you’ll get what suits you and your needs best. Just book a FREE “Maximize Your Wealth Potential” session here.
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