Buying insurance is a very delicate thing. On one hand, it is essential to get cover for life’s unexpected occurrences and yet at times, it seems like your insurance agent is pushing you more than what you really need. Sales agents are remunerated via commissions and some may be motivated to sell you policies to fulfil sales targets. That being said, you would want to find a responsible insurance agent. One who can advise you accordingly when it comes to possible shortfalls in your portfolio. Let us look at the usual types of coverage that most people purchase.
Life Insurance
Let us focus on the death benefit portion of life insurance. Sorry to sound so morbid but then this is the main reason why most people purchase a life insurance policy in the first place. Some people may say that a life policy accumulates value and can be used as a retirement planning tool. However, i would say that we should focus primarily on the main thing a life policy was designed to do and that is to cover death. The policy should include things like total permanent disability (TPD) and critical illness but for the sake of this discussion let us just stick with the term death benefit. However, many people are not aware of how much coverage they truly require. The common wisdom out there is about 2.5 to 3 times a person’s annual salary. I would cover about 5 times. This payout is mainly to help a person’s dependents tide through the unexpected loss of household income for the next few years. The problem with pegging this coverage to an annual salary is that annual salaries do vary. People usually get promotions and that is a precursor to receiving a call from his or her financial advisor to top up the shortfall in coverage.
For example:
Initial annual income: $80,000
Insurance coverage needed (3 times annual salary): $400,000
New annual income after pay increase: $120,000
Insurance coverage needed (3 times annual salary): $600,000
Shortfall: $200,000
The common thing to do would be to meet up with a financial advisor to purchase a life policy of $200,000 to top up the shortfall and cover $600,000 in total. This is assuming that the initial $240,000 is already covered by a policy. However, what if a few years down the road, this policyholder loses his job or is asked to take a pay cut?
Initial annual income: $120,000
Insurance coverage needed (3 times annual salary): $600,000
New annual income after pay decrease: $100,000
Insurance coverage needed (3 times annual salary): $500,000
Excess: $100,000
When this happens, the financial advisor or your insurance company is not going to tell you that they will automatically reduce your coverage and thus correspondingly reduce your premiums. The policyholder may be left in a situation whereby he is earning less but yet has to fork out high premiums based on the higher coverage.
So then, what is the solution?
My proposal for anyone who is thinking of buying an insurance policy for coverage against death would be to look at your qualifications. What would your degree or diploma comfortably get you in a normal job market? This means that even if you lose your high paying job, what is the type of pay you could be drawing if you were to go out and look for a replacement job. If the answer is $80,000 per annum then purchase five times of that in either a traditional life or term policy. This is your primary policy and you should never allow it to lapse.
So then you get a pay raise to $120,000 and there is a shortfall of $200,000 as in the first example above. My advice would be to cover this amount with a term policy. A term policy has the advantage of being cheap and since it is not a participating policy, you essentially are paying for just coverage. If you lose your job and cannot keep up with the premiums? Just cancel the policy when they call for the next premium. Cancelling a term policy does not require the assistance of your financial advisor. You just stop paying the premiums.
Health Insurance
Health Insurance can be divided into 5 different categories. Critical illness insurance, medical expense insurance(i.e. Medishield and Integrated hield Plans), hospital cash insurance, disability insurance and long-term care insurance. In my opinion, critical illness and medical expense insurance are the essential health insurance plans that need to be bought.
Critical illness is usually attached to a life insurance policy as a rider although it can be bought as a stand-alone plan as well. There is no accumulation of value and thus there are no returns, unlike a life insurance policy. The amount of critical illness you should buy should not be based on your income but based on healthcare cost in the unfortunate event of contracting a critical illness. The payout from a critical illness insurance plan should be to alleviate the cost of care for the policyholder as well as provide a sum of money for the end stage of his or her life. The amount of critical illness coverage a person should purchase would also depend on his or her budget but I would say that buying coverage of about $300,000 to $500,000 would be sufficient. Especially if you are covered by medical expense insurance. Some companies or organisations do offer group term insurance. For example, operationally ready NS Men can purchase group term insurance that covers critical illness for very low prices. This coverage is also extended to their spouse and children.
Medical expense insurance covers medical expenses arising from procedures like in-patient treatment or surgery, some day surgeries, X-rays and laboratory tests, and specialists consultations post surgery and/or hospital stay. For Singaporeans and permanent residents, we are automatically covered by Medishield Life from 1st November 2015. For those who want to use Class B1 or Class A wards as these are not covered under Medishield Life, they can opt to buy an Integrated Shield Plan or what some may commonly call a “rider” or “add-on” from a private insurer. This is also a good option for those who may receive lower subsidies due to means testing. I personally feel that it would be good to complement Medishield Life with an Integrated Shield Plan but do work within your affordability level as you will need to be able to afford the premiums. In fact, many start off buying the highest Integrated Shield Plan but eventually find that premiums are getting too high and eventually switch to a lower and more affordable plan. Please remember that the chances of one falling ill are usually higher as a person ages. Thus having the money to maintain the Integrated Shield Plan is important.
Buying insurance is something everyone should do. However, the amount which one should buy does vary due to various reasons. The amount to cover yourself with life insurance is based on your value in the job market whereas health insurance is based on your budget. When in doubt, a good financial advisor will be able to advice you accordingly.
Yours Sincerely,
