CMFAS M9 Risk & Life Insurance Fundamentals question: additional sum assured

CMFAS M9Risk & Life Insurance Fundamentals

For Mr Nathan, an adviser itemises the needs on death: outstanding mortgage S$420,000, final expenses S$25,000, education funding of S$120,000 for each of his two children, and an income-replacement capital sum of S$500,000. His family could draw on existing life cover of S$300,000 and savings of S$85,000. What additional sum assured should the adviser recommend?

A S$1,185,000
B S$885,000
C S$800,000
D S$1,100,000

Show the answer and explanation

Answer: C. S$800,000

Education need = 2 x S$120,000 = S$240,000. Total needs = 420,000 + 25,000 + 240,000 + 500,000 = S$1,185,000. Existing resources = 300,000 + 85,000 = S$385,000. Additional cover = 1,185,000 - 385,000 = S$800,000. Option A (S$1,185,000) is the gross need before offsetting resources.

Common mistake

Double the per-child education cost, then net off existing cover and savings — the answer is the gap, not the gross need.

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For Mdm Halimah's family, an adviser sizes cover so that the death benefit is steadily drawn down and completely exhausted by the end of the dependency period, leaving nothing at the end. The family needs S$45,000 a year and the children will be dependent for 20 more years. Ignoring investment return, what lump sum does the capital-liquidation approach require?Life insurance premiums for females are generally lower than for males of the same age. What is true of female HEALTH insurance premiums?An adviser wants the death benefit for Mdm Selva's family to generate S$42,000 a year of income WITHOUT ever eroding the capital, so a legacy remains for her children. He assumes the invested proceeds will earn a net 3.5% a year. Under this capital-retention (income) approach, what lump sum is required?

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