Getting the right cover in an economic downturn

Getting an insurance is a given but do we actually know how much of it is needed to get adequately covered in case of an untoward event? What happens when the main bread earner of the family dies? Will the family be able to maintain its current lifestyle? Do I need more than just one insurance policy? These are some of the question, which need to be answered to make a wise judgment before going for any kind of insurance scheme.

Let's take the case of family 'X' (an average middle class family in the UAE). The household income of this family is Dh30,000 a month. The expenses are as follows: rent or home loan (Dh10,000 a month), two school going children (fees Dh3000 a month for both), EMI's for car loan per month (Dh3,000) for two cars and monthly expenses amounting to Dh7000.

How much insurance does this family need to maintain this lifestyle and liquidate the outstanding loans incase of premature death of the bread earner? Will the insurance amount also factor in future costs like marriage and higher studies of the children? These are some of the most important questions that this family needs to ask before getting an insurance cover.

Emirates Business finds out from experts.

According to Chris Bagnall, International Risk Manager, Friends Provident International, Middle East, the amount of insurance needed by the average family would largely depend on the length of each of their financial commitments. "In the case of family 'X', assuming that the rent or home loan and monthly expenses would be needed for life, the children's education fees would likely be needed for ten years and the car loan two years, the likely amount of life insurance needed in the event of the bread earner's premature death would be in the region of Dh4,500,000.

"This figure would need to be adjusted to account for any capital or savings that the family already has in place. Future costs such as marriage and higher studies of children would be catered for in separate savings plans," said Bagnall.

Nigel Watson, Sales and Marketing Director at Nexus Group of Companies, said a multiple of fifteen times should be considered to make for adequate provision to replace the primary income in the case of family 'X'.

"In this example, this family should be looking at around Dh5 million. As the current income is servicing current financial liabilities and the cost of children's education this level should be sufficient for this family. However, it is essential that these levels and needs are reviewed with a financial advisor on an annual basis. Family circumstances do change and with recent hikes in the cost of education there may well be a need to adjust these levels periodically," he said.

Carlos Sabugueiro, CEO, Middle East and Africa, Global Life Emerging Markets, Zurich Financial Services Group said: "While Zurich International Life is not allowed to offer advice directly, we have a host of intermediaries including banks and international financial advisors who are licenced to directly sell our offerings to the public," "As part of the initial proposal offered on our insurance products, we include the life cover calculator which prompts the user to list all monthly and yearly expenses including the personal loans. After getting the details, the suitable amount the insurer should opt for is calculated of cover s/he should opt for," Sabugueiro Watson said: "As in the example of family 'X' factors such as higher education for the children and costs such as marriage need to be taken into account and hence the importance of regular reviews with a financial adviser. Most life assurance policies allow for alterations in the level of cover and also allow for other important benefits such as critical illness, which provides for financial security in the event of a terminal illness. This form of cover should also be considered in conjunction with life assurance needs of this family."

Age is another factor that plays an important role when taking insurance cover. At what age should one get insurance? Watson said: "It must be borne in mind that the cost of life assurance increases with age and lifestyle and therefore the sooner cover is purchased the less expensive it will be, and of course provides the peace of mind and security for the whole family."

However, getting adequately covered is not an easy task and there is no thumb rule or single formula to this, said experts. To begin with, experts say, an assessment of one's own financial needs taking into account the life stage, risk profile, dependants, disposable income should be taken into consideration.

"As a general starting point any financial advisor will recommend life cover between ten to fifteen times of annual earnings. In addition, any mortgages or outstanding financial commitments, such as children's education need to be taken into account," said Watson.

"Ten to fifteen times annual income should be considered. However, the important point to stress is that the needs of each individual or family will be unique and therefore these can only be fully assessed by speaking with an advisor."

Bagnall said: "The amount of insurance that one needs is dependent on individual circumstances. Considerations need to be made for all financial commitments – clearing debts, providing an income, child dependency and further activities that would maintain the current lifestyle, for example holidays and sports activities.

"Consideration would also need to be taken of how much capital and savings is already in place and any other arrangements that may already be in place – for example death in service benefit," he added.

According to experts, individual needs and circumstances remain of paramount importance. "Again, the relevant appointed financial advisor would be able to offer a conducive proposal based on the circumstances, health and lifestyle features of the individual. Once the term of the policy is determined, there is a calculation, which indicates the suitable life cover amount needed," said Sabugueiro.

"Questions around children's education, retirement plans as well as rider benefits like critical illness, permanent total disability or spouse income benefits are also considered. In addition, the advisor will ask more comprehensive questions around the health and lifestyle of the individual and factor these into the final quotation,' he added. Before purchasing any kind of insurance scheme, the customers need to keep in mind affordability as getting a very expensive cover can translate into financial drain of the purchaser.

Bagnall said: "The customer needs to assess their financial commitments with their advisor and draw up a plan to meets these needs. This should then be reviewed every couple years or as circumstances change."

Watson agreed: "An advisor will help identify the needs and types of cover most appropriate to one's circumstances. In addition to life assurance consideration should be given to critical illness and other medical-related policies. Not only should current circumstances, eg, income and financial commitments be taken into consideration but the future plans and aspirations that may affect the level of cover need to be taken into account."

Sabugueiro of Zurich said: "The advisor would help fill up an illustration with the relevant personal information that would help the individual to account for all important considerations before a proposal is made with suitable productss offered.

Coming to the kind of insurance scheme available in the market, there are many to choose from.

According to Watson, the most basic form of life insurance is known as "Term insurance". This pays out a fixed cash sum in the event of death and only provides cover for a specified number of years. It is probably the most cost-effective form of life assurance but not necessarily right for everybody's needs, he said Other forms of life assurance are known as "Whole of life" policies. These are designed to offer cover throughout one's life, have a wide range of additional assurance benefits. They are of course more expensive but provide a wider range of coverage. It is unusual for such schemes to have any form of built-in compensation to take account of inflation. The effect of inflation and changes in personal circumstances will be taken into account by your financial advisor.

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