I have been offered this saving plan with 3% premium.Got this agent said her company preaches a 10% of salary policy.Another agent showed me this newspaper article saying that one should set aside around 1/4-1/3.Which is which? What is the recommended proportion of my salary should I invest?
set aside what u can afford...
just in case something happened
and u need 'ready cash'
I see that the title is about insurance, but you are talking about savings.. I can't help thinking, are you being offered a Investment Linked Product? Careful about these cos it has got a pretty bad name in recent years. At first, they'll promise a certain rate of returns per year after some critical year. But so far a lot of these products never achieve it.
Another thing about insurance is to evaluate how much you are worth if there's a loss of income due to illness/ death/ disability. How much coverage will the policy be able to give you and your family if such things happen.
My Own personal View
There are basically 5 main type of insurance out there
1.) Term Insurance
2.) Endowment
3.) Life Insurance
4.) Investment Linked Policy
5.) Annuity
Term Insurance
Good for high Coverage with low premium. However, there is zero residual Value. another downside is that the premium payable yearly increases as you ages.
Recommended for Young Individual with little spare cash to insure themselves
Endowment
A forced Saving plan with minimum coverage. Extremely high premium payable. Many Insurers claims that the return is very high, but after i did some simple interest calculation, it work out to be roughly 2.5%, only slightly better that fixed deposit. another downside is very long term, 20 to 25 years.
Recommended for individual who have difficulty saving on their own and also need some minimum coverage.
Life Insurance
A must for all poor folks out there, it is basically a high coverage with medium rate of premium. It is also a long term investment and the good thing is that unlike endowment which mature on a specfied date, this insurance stay with you for life until you choose to surrender it. A good method is to keep it until you are around retirement age, then surrender it and get the surrender value to reinvest in Bonds which will be able to give you some monthly cashflow. Since when you retire, rightfully, you should have build up a nest of money to fend off any potential mishaps which might happen to you.
Recommended for everyone.
Investment Linked Policy
This get a bit tricky here. Basically it is able to give you very high coverage with reasonable premium, however you must be aware of the underlying mortality charges associated with it. Meaning, example when you are young and you monthly premium is $100, 80% of it goes into investment for you while the remaining 20% goes into the mortaility charges. So when you get older this percentage will shift more toward mortaility charge which it mean will generate lesser return for you. A rule of thumb is that you should hold you Investment Linked Policy till you reach age 55 cause that is the time when your mortaility charge get very high and if you carry on holding on to it, it will eat into whatever cash value that you have accumlated over the years.
My Personal example,
Policy Coverage $200,000
Monthly Premium $100
Current age 25
Target age till surrender the policy 55
When i reach 55, i will have invest a total of $36,000 and my cash value then at 5% annual rate should be around the region of $30,000. Meaning I make a loss of $6,000
U divide that by 30 Years, then 12 months then 31 day, it work out to be $0.54 Cent a day.
This mean I am paying $0.54 Cent a day to get a coverage of $200,000 which i think it worth it cause i wun know when mishaps will happen to me.
Recommended only for Young Individual as the Mortality charge is still low
Annuity
This is basically a gurantee from the insurer that at the age of 62, you will received a monthly payment depending on your invested amount at age 55 for the rest of your life till you die. A rough estimate of breakeven years is around 14 years. Meaning if you were to live beyond the age of 76, every single cent you get then will be pure profit and even if you were to die before that, whatever leftover will still be paid out to your dependents if any.
Recommended for near retirees who think they will live a long life.
Just my 2 cents worth thoughts
If you don't have liabilities, you don't need insurance.
If you want to grow money, look for other investment instruments which wouldn't have a charge for protection, thus giving better returns.
As for how much you save, it really depends how much you can spare. It is recommended that you set aside between 3-9 months of monthly income as emergency funds.
As a rule of thumb, only invest what you can afford to lose.
That's how i look at it.