Question

Ben is living in Kuala Lumpur with his 10 years old son. His wife has passed away a few years ago. His loss has alerted him on the importance of obtaining a risk management plan, especially for those dependent caused by premature death. Taking care of his son’s financial well-being has become his top priority.

When his wife passed away, Ben has to face all the financial pressure especially medical treatment spent. The insurance claim of RM30,000 from his wife is barely enough to cover the medical expenses and funeral expenses.

Ben is a senior software engineer for a public listed company in Ipoh, Perak. His current annual income inclusive of bonuses and fixed allowances is RM120,000. The employer provides a general group life insurance from ABC Insurance Bhd. The sum insured amount will be triple of his annual income.

Besides his contribution to the Employees Provident Fund (EPF) and Private Retirement Scheme (PRS), he also has allocated some money in the education funds through SSPN for his son upon enrolment to further study.

Ben’s has the following financial needs and objectives if he were to face premature death:

• Estimated funeral costs RM30,000
• Medical bills RM30,000
• Lawyer’s fees RM5,000
• Income support for his son. RM1,300 monthly for 8 years
• Housing loan outstanding RM280,000
• Car loan and credit card debts RM50,000
• Education funds (Engineer – Local) RM180,000
• Amanah Saham Malaysia RM10,000

• Fixed Deposit RM50,000
• SSPN RM10,000
• Private Retirement Scheme RM30,000
• EPF Balance RM185,000
• Individual life insurance (sum insured) RM50,000
• Group life insurance (sum insured) RM240,000

1. Based on the information above, you are required to estimate the additional insurance need by using the human life value approach at the discount rate of 5 percent, if Ben allocates 60 percent of his earnings for his son until he reaches 18 years old.

2. Measure the amount of insurance need by using the needs approach.

      

3. If the estimated Life Insurance survivor benefits from existing group life insurance are paying RM650 monthly to Ben’s son until he is 18 years old, Calculate the additional life insurance needs.               

Answer 1

PART A

Human life Value is the method of calculating life insurance is based on contribution that one makes and would have made to her/his family in case of sudden demise.

so HLV is defined as the present value of all future incomes that you could expect to earn for your family's Benefit. It also includes other value you expect to contribute ,less personal expenses , life insurance premiums and taxes through your planned retirement date.

based on the above provisons , the sum is solved below,

Gross Total income= RM1,20,000, on this 60% of earnings(RM72,000) is allocated to his son, Suppose ben dies at now, then the economic value added every year to his son is longer there. so to protect this economic value , Ben can use Life Insurance safety value so in case of his death, this economic value can come to family.

so the insurance cover required = RM72000*11.686(5% P.a capitialised over 18 Years)= RM8,41,392.

PART B

Additional Life insurance needed = RM8,41,392 -RM650*12*18= 7,00,992.