Insurance: How Much Is Enough?
by
Unknown
- 00:05
The Main Purpose
At the first thought of insurance, most Singaporeans probably think of those financial advisors by the road or shopping malls pulling you over to do a quick survey, or inviting you over to their booth to listen to what they have to say with no obligations to purchase anything.
Some people give in and start considering what to buy, but here's the thing. If it's getting covered, I personally have no qualms in buying such products to secure me for a unforeseen circumstance. However, I've shared in an older post why I would not mix insurance with investment. However, it is up to you to decide if you are able to do that as well, because every individual has different circumstances and my decision may not be right for your situation.
However if you ask me, there's only three types of insurance products that I would purchase when I've just started working. As a personal rule of thumb, anything above 10% of my income to pay for insurance policies is over my budget. Let's see what I would get.
1) Term Plan
2) Hospitalisation Plan (a.k.a Integrated Shield Plan/ISP)
3) Accident Plan
Term Plan
Term insurance is basically insurance that covers you for a fixed period. After the age of 65, the coverage gets costly. This is why I am only covered until age 65. As it has no cash value (i.e no savings/investment component), the policy is generally cheap. However, you are technically paying them for 'free' if nothing happens to you.
The money you save on getting term compared to getting a whole life policy should be invested so that you can generate returns to build your retirement nest. The only reason I am covered until 65 is to have some money left behind in the event that I pass on and my dependents have no money to lead a proper life. Past age 65, I only have to be concerned for myself and being covered by a hospitalisation plan is more than sufficient.
However, this is my personal ideal. If you like something with cash value or disciplined savings, a whole life plan may be suitable. For people like me who prefers to generate passive income on our own, it is generally not recommended to get a whole life.
The main aspects of coverage would be Death, Total Permanent Disability (TPD) and Critical Illness (CI). Some people also prefer to get covered for ESCI/ECI, Early Stage Critical Illness. I don't for two reasons: If I require treatment in the hospital, I am covered by my ISP, and it is very costly to get covered for ESCI, which can nearly double your premiums for a term plan. How much coverage you need is dependent on your personal goals. For myself, I am insured 500k per aspect. Just a reminder though, for CI, always check what types of CI are covered by your insurer before purchasing it.
Most agents would not recommend a term plan because the commission they earn is much lesser compared to a whole life. However, should you want a term plan, stand your ground and insist on what you want. It's your money, not theirs. If you think a whole life plan is worth listening to, go ahead by all means.
Hospitalisation Plan / ISP
I've seen friends who've gotten ILPs, endowments and every common plan agents like to throw to them. But when I ask them if they have an ISP set up, most would say 'I didn't know about this'. That's preposterous. If you were to get hospitalised without an ISP right now, can you afford to pay the bills?
An ISP is cheap (though it rises in accordance to age) and is a must get in Singapore. There are two components, one is deducted via your Medisave Account and the other is paid by cash. Generally the cash component is cheap and affordable, and should not cost you more than $40 - $50 per month, most of the time lesser. By choosing the right type of ISP, you are covered for most hospitalisation charges like surgery, warding and consultation etc. The type of ISP that suits you is really dependent on what you prefer. If you only want to stay at Class B Ward and above, you need to get an ISP which insures you for that. Look around for an ISP that suits you, just because it's cheap doesn't mean that all ISPs are the same. You can get a better deal for the same premiums most of the time.
You can look at the available plans here, on the MOH's official website.
Accident Plan
I've spoken with some of my friends, colleagues and investors who share a common goal with me. The opinion on whether an accident plan is necessary or not is split almost evenly. Some do not see the need for this plan as the term plan and ISP covers both possibilities of an accident. In death or TPD, term plan covers the payout, and in the event of hospitalisation, ISP covers it.
However, I did purchase an accident plan for myself. The primary reason is that because it's cheap, and also certain conditions of an accident does not warrant a payout by the term plan, for example, loss of a finger. The chances are low, but the purpose of insurance if to be covered for the unforeseen future anyway. Get it or not, it's up to an individual's opinion.
Conclusion
Most financial advisors do not recommend these 3 products when they first meet their clients (because of the commissions). It is only offered when you ask about it and even then they will probably market a whole life policy or ILP with insurance coverage. However, always remember the costs and fees involved. Your money would probably fare better in an index fund.
If you don't know the benefits of index funds and bonds to create a stable portfolio yet, the least you could do is read up a little on it, and refrain from buying policies that lock your money for decades unless you feel that you need this sort of forced discipline. I'll share in the next blog post about ETFs, index funds and bonds. Stay tuned!
Comment, questions, opinions? Leave a comment below!
-WC
