A New Chapter in Life

Review Family Protection after Getting Married and Buying Home

1 April 2017

 

A New Chapter in Life

Review Family Protection after Getting Married and Buying Home

Our Expert

Ms. Christine Ng

Associate Director of Convoy Financial Services Limited

A New Chapter in Life

Review Family Protection after Getting Married and Buying Home

David and Mary purchased a property late last year and started a new life together. In view of these significant changes, David asks me to review his life insurance, hospital and critical illness plans, and to analyze his current needs.

David's Financial Profile

Age 35
Occupation Head of logistics department
Marital Status Married for over two years
Family Member Wife (Mary): 35 years old
Mother: lives in David’s old home
Monthly Income HK$50,000
Monthly Household Expenditure HK$30,000
Mortgage:HK$10,000
Living Expenses:HK$12,500
MPF:HK$1,500
Tax:HK$3,000
Insurance:HK$3,000
Monthly Surplus HK$20,000
Assets Liquid assets: HK$800,000
Property: mortgage of around HK$4.2 million
Risk tolerance Level Medium
Financial Goals/Concerns The client wants to review his current insurance needs after getting married and purchasing a property.

Life Protection – Long-term Protection for Spouse

Generally, a life insurance plan is designed to cover the outstanding liabilities in the event of the decease of the insured. Years ago, David took out a whole-life insurance plan to his mother’s benefit with coverage of HK$1.2 million. As he got married and purchased a house, his outstanding liabilities after death increase as well.

David and Mary are financially independent now. But as a husband, David wants to prepare a reserve for Mary until she retires at age 60 when he is not here.

He wants to have a reserve of about HK$3 million (annual living expenses of around HK$120,000 x 25 years). Besides, the outstanding mortgage of his newly purchased property is around HK$4.2 million.

In other words, after deducting his current liquid assets (HK$800,000), he would need another life insurance with a coverage of HK$6.4 million (HK$3 million +HK$ 4.2 million – HK$800,000 = HK$6.4 million).

Medical and Critical Illness Protection – Full Protection for Early-stage Diseases

David injured his cruciate ligament on left knee in a football match three years ago, and the surgery cost him HK$50,000, making him realize the importance of medical insurance.

So he took out a full-coverage medical insurance plan two years ago. Unlike traditional medical plans, this plan offers full reimbursement of all major medical expenses without individual limitations. The expenses of radiotherapy, chemotherapy and targeted therapy are also covered. David is now under full medical protection.

In addition, David has a lifelong critical illness insurance plan with a coverage of HK$400,000. Since his existing medical plan can cover any expected medical costs, he should have a critical illness coverage sufficient to cover his expenses for two to three years.

As such, I would suggest David to take out another critical illness plan with a coverage of HK$680,000 (annual household expenses of HK$360,000 x 3 years; net of current critical illness coverage of HK$400,000).

While critical illness plans used to offer a lump sum benefit when the insured is diagnosed with a critical illness (such as terminal cancer and heart attack), many plans available nowadays have extended the coverage to certain early-stage illnesses (such as carcinoma in situ and chronic pulmonary disease). Some even allow multiple claims against critical illness. David can choose a plan that best suits his needs and budget.

Low-return Life Insurance Plan with Savings Element – to Keep or not to Keep?

Five years ago, David took out a 20-year life insurance plan with savings element, and the annual premium is HK$13,000 in the first 10 policy years. The capital will be locked up from the 10th to 20th year. He is expected to receive HK$180,000 at the end of the 20th year, so the average expected annual rate of return is 2.1%.

David took out the plan because he wanted to nurture the habit of saving, and he was not aware of the final rate of return.

As the rate of return is relatively low, Mary is considering to cancel the plan on the upcoming policy anniversary. Since the policy has been in effect for five years, David will only be able to retrieve part of the capital (around HK$15,000) if he terminates the plan. David finds it hard to decide and seeks my advice.

Tips

I understand the concerns of Mary because the annual rate of return of the plan is relatively low, and the capital will be locked up or 20 years, when David, at age 30 to 50, would have a greater need of liquidity. In fact, there were better alternatives when David took out the policy. However, it would be unwise to cancel the plan now as he will incur a loss of HK$50,000 (capital of HK$13,000 x 5 - HK$15,000).

I suggest David to keep the plan for another five years so that he can retain the capital and receive HK$180,000 upon expiry.

Proposed Insurance Expenses

Existing life insurance $900
Existing medical insurance $500
Existing critical illness insurance $500
Existing insurance with savings $1,100
(New) Life insurance $1,200
(New) Critical illness insurance $1,300

Proposed Monthly Expenses

Monthly income $50,000
Current monthly expenses $30,000
Proposed monthly expenses
(including new policies of HK$2,500)
$32,500

Disclaimer: The above information is provided for reference only, and does not constitute any investment advice or offer. You shall not make any investment decision relying on this article.

The author has endeavoured to ensure the accuracy and reliability of all information (including data) provided, but the information shall not be interpreted as a guideline for consumers. The author accepts no responsibility or liability for any loss or damages suffered by any person due to any inaccuracy or omission in respect of any information provided in the article. Different plans have respective terms and conditions which are stated by different product providers. Please refer to the respective principal brochures for detailed terms and conditions.

Our Expert

Ms. Christine Ng

Associate Director of Convoy Financial Services Limited