A steady income for your loved ones
In this fourth instalment of a six-part series brought to you by Tokio Marine Life Insurance Singapore, we explore the concept of income replacement
Given life's unpredictability, it is imperative that one is prepared for unforeseen circumstances - for example, impaired health, permanent disability or even death.
Besides being financially equipped to settle the immediate costs related to such situations, one also needs to plan for income replacement in the event that one cannot be around to physically provide for the family.
My Paper spoke to Ms Cheryl Lau, a senior financial-planning consultant at Tokio Marine Life Insurance Singapore (TMLS), about income replacement, and how life insurance can help.
What does income replacement mean in financial terms?
We work hard and have provided our loved ones with a comfortable standard of living. We are able to afford this standard of living largely from the income that we take home - whether single or dual income.
It is often the desire of many to have their loved ones continue to have a similar lifestyle, even if they are no longer able to provide for them physically.
So, simply put, income replacement is a way of receiving income from another source, instead of the individual's regular source of income.
In financial-planning terms, this is often sought when sickness, injury resulting in total and permanent disability or death hampers the individual's ability to earn an income from working in a regular job to provide for his or her loved ones.
The aim is to have an income sufficient to maintain at least the standard of living prior to the event that led to the inability to earn income via a regular job.
How does life insurance help in income replacement?
Broadly speaking, there are two ways of earning income - man at work and money at work.
When the option to earn income from one's regular job is not viable due to sickness, injury or disability, we then rely on money at work to earn an income.
When planned appropriately, a life-insurance plan would pay a lump sum, which gives one the opportunity to invest and draw a regular income.
This amount needs to be sufficiently large as a capital sum to earn the required income when invested.
At TMLS, TM Legacy Plus is designed specifically to meet income-replacement needs by offering up to 2.5 times the sum assured, to give your family that large-enough capital for income-replacement needs.
What are some of the considerations to keep in mind when planning for income replacement?
It is recommended that one plans for:
This would include an emergency fund to cover last expenses and such; a family adjustment fund to cover personal debt, ancillary costs, mortgage-loan settlement, dependants' contingency fund - for example, spouse's special retirement needs or even graduate course fees.
In planning for regular income needs, one may consider taking the following steps:
i) Calculate how much your family expenses are;
ii) Determine how long your family will need the income (most people usually plan for the youngest child to be economically independent and/or the retirement needs of a surviving spouse);
iii) Take into account what funds have already been made available for this financial need;
iv) Take into account a reasonable inflation and investment-return rate.
It is important to understand that in the event of a total and permanent disability or living with impaired health, one also needs to factor in one's own living expenses.
What are some of the insurance options available?
Depending on how much one can afford, there are different ways to meet this need.
You may explore term plans or whole-life plans. Some people may even consider reducing term assurance on the basis that the amount required to support the family until financial independence gets lesser as time goes by.
Income-benefit riders may also be included in a plan to provide a more comprehensive cover.
For more information on the types of insurance available, speak to your preferred adviser or visit www.tokiomarine-life.sg