Life Insurance Needs: Rules of Thumb

The rules of thumb are simple and do not consider many of the factors. However, it is easy to use and will provide a starting point for your insurance-need evaluation.

FSM Nov 15, 2017 4021

In general, a rule of thumb is a simple guideline that can be easily applied to a situation. Sometimes, we may find it difficult or feeling confuse to decide how much life insurance we need as well as how much we should spend for insurance. At the end, the mind obstacles may delay us to get an adequate protection against life uncertainties.

Although the rules of thumb do not consider many of the factors, it is easy to use and will provide a starting point for your insurance-need evaluation.

Rule of Thumb #1: Cover amount of 6-8 times of your annual income

The most basic guideline for determining an insurance requirement is six to eight times your gross annual income. Under this rule, a person earning a gross salary of RM50,000 should have between RM300,000 and RM400,000 of life insurance.

Rule of Thumb #2 – Allocate 5% of income for insurance premium

Sometimes, budget will be one of the constraints to decide the amount. Therefore, we can work backward by allocating 5% of our income as insurance premium and then buy as much life insurance as you can get using that premium amount. For example, you are earning RM3,000 per month, and you can allocate RM150 on a monthly basis and get the maximum protection amount based on this budget.

Rule of Thumb #3 – Cover the period your dependants need your income support the most

No doubt we would want the insurance policy to cover us as much and as long as possible. However, the insurance cost varies depending on the coverage period and sum assured.

When you need certain amount of coverage but with limited budget, you may reassess the coverage period of the insurance. If your main objective of buying insurance is to provide financial support to your family or loved ones when they need it most rather than leaving behind a legacy, you may set the coverage period to an adequate one instead of a long duration. When the coverage period is shorter, the insurance cost will be lower. For example, if you intend to provide income support to your family until your retirement age, you can consider setting the coverage period up to 65 years old instead of 80 years old.

Advantage and Disadvantage of Rules of Thumb

The rules of thumb are simple and easy to understand. They are useful as a rough starting point to start with in assessing your insurance needs. But as it is very general, it may fail to consider the needs and circumstances of the individual such as debt level, family income and etc. Nonetheless, if it helps you getting started with your first life insurance policy, your protection gap will be narrowed down.

For any further enquiries, drop us an email at and our dedicated team of advisers will be happy to assist you.


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