Earlier this month, I’ve talked about understanding cash flow, how you can protect yourself from going bankrupt and goal settings. However, things don’t always go according to plan. We may have the best budgeting hacks, savings accounts and investment strategies. But what if something were to happen to us and we’re unable to keep our jobs? We wouldn’t want to risk losing all our hard earned savings or put our families in a bad financial situation! This is when the importance of insurance comes into play.
In this article, my goal is to introduce all the insurance plans available in the market, whether it’s worth getting and how I plan the amount of coverage I need.
Disclaimer: The list of insurance plans below are ranked from the most important to least important based on my own opinion. I am no insurance agent, but I’ve done a lot of research and met a number of agents who share similar sentiment with the order below.
Before we begin, here are some things to note:
- Insurance agencies usually require us to undergo medical underwriting or health declaration when we purchase their policies. If we have any existing conditions, the insurer may choose to exclude that particular condition or raise our premiums.
- Premiums will increase with age and lifestyle. A 30-year-old smoker will have to pay more than a 25-year-old non-smoking adult. These premiums are usually fixed (except hospitalisation) till they mature, expire or upon renewal.
- This means the best time to insure ourselves is when we are young, healthy and have no existing medical conditions.
- Insurance isn’t always cheap. We should plan and set aside a small sum of money to protect ourselves from the “what ifs” in life. Generally, a well covered individual would spend about 5-10% of their annual income.
- If you do have an existing medical condition, your priorities would differ from a healthy individual. Please contact your trusted agent and I’m sure they will be more than willing to help you.
If you need help in finding a good agent, drop me an email / PM at firstname.lastname@example.org or https://www.facebook.com/thefivelayers and I’ll link you with my personal agent. He’s an independent financial adviser (IFA) and has access to almost all the insurance policies from the major insurance firms. You get to compare and select the best policy amongst the different insurance companies and get the most value depending on your needs, saving time and money.
1. Integrated Shield Plan AKA Hospitalization plan
*Image from CPF
This plan covers medical bills so long as we are hospitalized. As compared to MediShield which only covers up to Ward B2, getting a hospitalisation plan allows us to stay in a private hospital for wards A and B1. This plan is regarded as the “most important” because medical bills can be really costly should any unfortunate circumstances fall upon us. Click here for a cost guide on hospital treatments in Singapore. Luckily for us, hospitalisation shield premiums are extremely cheap and allow us to claim up to 90% of our medical bills. We only need to pay the first $1,500 – $3,500 and 10% of the remaining bill, also known as deductibles and co-insurance.
Want full coverage?
*Image from AXA’s brochure
Insurance firms that sell shield plans often allow the insured to add a rider on top of their hospitalization plans to cover the deductibles and 10% co-insurance. The premiums are slightly more expensive but may be very well worth. With increasing medical costs, a $100,000 medical bill today could cost about $450,000 in 30 years time. 10% of that and we have to pay $45,000. If we are unfortunate and have to pay a million dollar bill, that’s $100,000 of our savings gone! While there is no guarantee how much medical bills will cost in the future, personally, I would prefer to pay a more expensive premium and have full coverage. That way, I know I wouldn’t have to worry about hospitalization bills in the future and any form of hospitalization would not put my retirement funds in jeopardy.
Unlike Critical Illness and Term/Whole Life plans, the premiums for Shield plan will increase as we age. Due to the rapid rise in medical costs, most, if not all insurance agencies will adjust their premiums from time to time.
If you think getting the rider is too expensive, you may want to get the plan in the following order from the most important to least important:
Integrated Shield plan > Co-insurance benefit rider > Deductible benefit rider
2. Critical Illness (CI)
As the heading says, Critical Illness plans insure us if we are unfortunate to land with one of the 36 defined critical illnesses. A few examples include heart attack, cancer and stroke. There are plans that only cover critical illness but they usually come as a rider to our Term/Whole Life insurance (See point 3).
A common misconception for Critical Illness plans is the sum assured by the insurer is meant for hospitalisation. This is wrong as hospitalisation is covered by a Shield plan (ISP/Medishield) and the sum assured is supposed to cover our loss of income / medical expenses not covered by the shield plan while we recover at home.
A good gauge on how much coverage you should have is usually 4-6 years of your annual income.
While the chances of recovering from critical or terminal illness are low, early detection increases our chances of survival by 2-3 folds. Thus, one may consider getting a rider that allows the insured to claim part of the sum assured under “Early Critical Illness“.
The second type of rider allows one to claim “Multiple CI“. Below is an example taken from a plan I’ve gotten from Aviva recently (not sponsored).
*Source: Aviva Website
Although it sounds really good, the premiums for these riders usually cost ~4 times more than the usual CI plan. I’m paying about $1,000/year for early CI + Multiple CI rider while the usual CI rider only costs $260. To have a good gauge on the market rates for CI plans, you may want to visit DIY Insurance.
Now the million dollar question is…
Is it really worth it? Should you get these riders on top of a CI coverage?
Unfortunately, I do not have an answer for that as it varies for each individual. It’s totally up to you to decide.
A few points to note:
- These riders usually have a limit for the claims we can make for the same category. In this case, Aviva groups Early cancer, Heart-related illness and Nervous system/Systemic conditions separately and each group may only be claimed once.
- Critical illness may or may not be claimed twice if there is a relapse, depending on the insurer.
- There is usually a waiting period between each claim
My take on this is the Multi CI rider should, at the very least allow us to make subsequent claims for the same Major CI as the chances of relapse is higher than getting a new CI.
A few questions you might want to ask yourself:
- Check your family history if there is any record of inherited cancer genes. If yes, don’t panic because it doesn’t mean you will get cancer. But it would help you make better decisions when getting a CI plan (Increased coverage, multi coverage etc).
- Can you afford these riders? A well covered individual would typically spend 5-10% of their monthly salary on all their insurance needs. Don’t put yourself in a situation like one of my agent’s clients who spends 60% of his monthly salary on insurance + other products that don’t align with his future goals (yes, he was scammed by another agent) and has little to no funds left to build his other layers of wealth.
If you think getting the early CI and Multi CI rider is too expensive, you may want to get a CI plan in the following order from the most important to least important:
CI plan / rider > Early CI rider > Multi CI plan / rider
3. Term/Whole Life insurance
These plans give us a lump sum of money when we die (Death) or become permanently disabled (TPD).
Why is this important? Similarly to CI, they cover the loss of income for our family should we leave this world or are unable to work due to permanent disabilities. Some also purchase such plans to leave a “legacy” for their loved ones.
Term vs Whole life
This is a topic for another article. There are people who worship Whole Life plans and others that resent them. In a nutshell, I feel both Term and Whole Life plans have their pros & cons and we should only purchase the plan after knowing how we would prefer to approach our personal finance. The main difference between Term and Whole Life insurance is one covers you till a certain age (Usually 65-year-old for Term) and the other for “life” (Usually 99 for Whole Life).
*Image from moola
I would also like to add that even though a Whole Life plan gives you the option of withdrawing your cash value, you would lose your coverage during the process. This is extremely important especially if you are planning to leave a legacy for your loved ones.
How much coverage should I get?
It’s difficult to determine the exact figures as our expenses increase when we reach certain milestones. Still confused? Here’s what I mean:
- A typical student may not require a high death coverage as he/she does not have any housing loans or dependents. The death coverage they require should minimally be sufficient to support their parents through retirement and cover their student loans. The worst case scenario that could happen at this age would be an accident that requires medical care for the rest of their lives. Thus, one may consider increasing their coverage just in case.
- A typical working adult looking to start a family would require an even higher coverage as they have to account the loss of income for their children’s upbringing, home loans etc.
- A typical 65-year-old senior citizen looking to retire would require minimal coverage as they have no dependents and loans to pay.
Here’s how I do it
Before I begin, I would like to emphasize that the illustration below is for my own planning. It wouldn’t be the same for everyone because it depends on whether you plan to have no kids or 4 kids, stay in one room flat or condo, parents have sufficient retirement funds or not etc. In a nutshell, coverage needed is different for everyone.
The best way is to ask yourself and have a rough plan of your future. If you really can’t, speak to your trusted financial adviser. Should you decide to upgrade your lifestyle in the future, don’t worry, you can always increase your coverage in the future.
Death Coverage = Debts/Loans + Dependents
The way I plan is simple. Assuming if I were to die or get bedridden at the worst possible timing, (just moved into my BTO with a huge housing loan to pay, with other outstanding loans, have 2 babies, parents not enough retirement fund, only breadwinner of the family) I take the sum of my debts and expenses at that time to get a rough estimate of the coverage I require.
In this case: $350,000 (to support my disability / death benefit for my other half) + $350,000 (Housing) + 2*$300,000 (Kids) + $200,000 (To support my parents retirement) would add to about $1,500,000.
Optional legacy planning: I plan to add a buffer of $300,000 to support my wife.
Are my calculations above exaggerated? In my opinion, yes.
- Firstly, there are schemes available for single parents and this would reduce the costs of raising kids by a huge sum.
- Secondly, if death was caused by a CI, the insurer would also payout the CI portion.
- Thirdly, my company provides a group term insurance covering 36 times my monthly basic salary.
- Fourthly, in the event I’m bedridden and disabled, there will be disability insurance given out on a monthly basis to cover my loss of income (see disability insurance below).
- Lastly, if death isn’t caused by CI, chances are it is caused by an accident. Insurance companies would also payout if we have a personal accident plan.
Thus, my realistic coverage for Term+Whole Life would be much lesser! But in my humble opinion, it’s better to have more than less. Just treat the additional payouts from the other insurance plans as an additional benefit. Term Life plans are usually cheap for the amount of coverage we get, and even better if we are eligible for the MINDEF group Term plan.
My insurance buying strategy
Firstly, I add all the sum insured from my current Term/Whole Life plans.
Note: If you own a Whole Life plan, you can call your insurance company and request for the latest benefit illustration to be mailed to your house. From there, you can see the declared non-guaranteed bonuses and current cash value of your plan.
|Company A||Whole Life (Since childhood, plan matured)||50,000 + 14,000 declared bonus + future non guaranteed|
|Company B||Whole Life (Since childhood, payable for life)||75,000 + 16,000 declared bonus + future non guaranteed|
|Company C||Whole Life (Since childhood, plan matured)||15,000 + 9,000 declared bonus + future non guaranteed bonus|
Total = $179,000 + future non-guaranteed bonus
Secondly, I subtract it from my expected coverage at my current age.
|28 (Marriage)||900,000~1,200,000||-721,000 ~ -1,021,000|
|32 (Kids)||1,500,000~1,800,000||-1,321,000 ~ -1,621,000|
|70 (Retired with no loans)||0||0|
As you can see, I need $321,000 to be covered at my current age and at 55 when I’ve fully paid my housing loans and children’s education. What I did was to get a Term plan with a fixed premium that will cover $350,000 till I retire. When I signed up for the Term plan, I noticed it only costs a few dollars more per year to cover $500,000 (economics lol) so I just went on with it.
Lastly, the remaining will be covered by personal accident / company’s group term plan. For me, I didn’t add the company’s plan because there is no guarantee I’ll be working in the same company for life and not all companies provide insurance for their employees.
$1,321,000 (required coverage at 32) – $500,000 (term life) – $100,000 (personal accident) = $721,000. Plus $300,000 legacy planning = $1,021,000
If you are a Singaporean male that served National Service, the MINDEF group insurance under Aviva is a good plan to keep as it is one of the cheapest if not the cheapest plan in the market. However, do not be too reliant on it as a massive disaster could limit our claims. While we are young and in good health, we can easily get the maximum coverage of $1,000,000 at $41/month. The best part about this plan is they will return a portion of the premiums paid for that year if there are little to no claims made. My strategy here is to cover the remaining ~$1,000,000 with this plan and slowly downgrade as the years pass.
My tip: It’s best to get the coverage we need at the “worst case scenario” while our health is still in good condition than to upgrade as we hit certain milestones (e.g, increase coverage from $500,000 to $1,500,000 after we get married). We’ll never know what is going to happen tomorrow and if (touch wood) anything happens to us, getting an additional coverage will be tougher as we will have to fill a medical declaration form when we want to increase the sum assured.
4. Disability income insurance (DI)
Most people get confused and associate this plan with TPD and Long term care insurance. TPD pays a certain percentage of the sum insured when we permanently lose a portion of our body (limbs, eyes etc) while the long term care insurance plans provide us with monthly income in the event we aren’t able to do 3 out of 6 of the activities of daily living.
Disability income insurance
Disability income insurance protects us and pays a certain percentage (up to 75%) of our declared salaries in the event we aren’t able to continue our current jobs due to illness and disability till the retirement age of 55-65.
A few good examples would be:
- Singer loses his voice
- Door to door salesman loses his ability to walk due to spinal injury
- Analyst suffering brain damage
We don’t usually hear about this plan when we meet our agents because only 3 out of the 8 leading insurance companies offer it. These companies are Great Eastern, Aviva and AIA.
Is it necessary to get this plan?
Yes and no. A few things to take note:
- Your greatest asset is yourself and your ability to work & generate income. For me, while I’m still young and have about 41 years to retirement age, I have huge growth in human capital ahead of me. Assuming my annual income is $45,000 and with a salary increment of 2.5% yearly, I would have an estimated capital of $3,232,791 after 41 years. Should anything happen to me tomorrow, I will potentially lose my $3.2m capital but with disability insurance, I could protect myself to about $2.5m.
- As we age and achieve financial stability or freedom by building our five layers, our needs of disability insurance would decrease. I see no point in getting this plan if we don’t have to work for money.
- To be eligible for claims, we must be employed at the time of disability. Freelancers are not eligible, but may wish to consider freelance income protection offered by Etiqa.
- There is a waiting period before the payout begins. It ranges from 2-6 months and insurance companies charge higher premiums with a shorter waiting period. If we have our emergency funds set aside, this shouldn’t be a huge issue.
- If we are back to work after the recovery period of 24 months and are drawing the same salary or earning even more, we will not be eligible for claims. If we are earning lesser, the insurer will top up to meet the sum assured.
I find this plan a great value for money (est ~$1/day for $3,000 coverage) especially if we are young, gainfully employed and still have many more years till retirement.
5. Personal accident (PA)
For a small premium (less than $200/year), it covers death / TPD caused by an accident, medical expenses, recovery care, TCM and even Chiropractors if the injury is caused by an accident due to recreational sports, leisure underwater activities and so on. Some even have full terrorism coverage!
Earlier when I talked about Integrated Shield plan, we will have to pay the first $3,500 on hospitalisation bills if we do not have a deductibles rider. In the event of a minor accident and we are charged $3,000 for a one day stay to do some additional scans and stitches, we still have to pay the full bill.
Many like to combine this plan with hospitalization as it helps them cover the deductibles portion while having extended coverage to TCM and Chiropractors.
You should consider this plan if you are an outdoors person that enjoys hikes, sports and motorcycling or if you are working in an industry that is more prone to accidents (e.g. Engineering, Grab/Taxi etc)
Personally, I got this plan because I’m injury prone when doing sports and I consider my work environment risky.
6. Long term care insurance
The Long term care insurance plans provide us with monthly income in the event we aren’t able to do 3 out of 6 of the following activities:
*Image from policypal
The most basic plan in the market is provided by the government and by 2020, all Singaporeans and permanent residents will be covered by CareShield once they reach 30 years old. This plan will replace the current ElderShield plan.
*Image from MOH
Long term care insurance is extremely difficult to claim as the insured must be certified by a doctor that he/she is unable to perform 3 of the 6 daily activities. Its main purpose is to help families with the high cost associated with taking care of the insured. If we already own a Disability insurance and Term/Life plan, the basic plan provided from the government is sufficient. At the moment, I don’t see any value in getting any additional coverage for this as it is much easier to claim disability income and TPD. One might argue that disability income only provides us with income till 65 and TPD is just a one lump sum payment. Even at the worst case scenario where the insured suffers from paralysis at 66 years old after his/her DI and term life has expired, the insured will have sufficient income from CPF, personal savings and an additional $1,000 from CareShield to cover them for life. So I’ll prioritize disability income over this plan unless I’m self employed and want additional coverage.
7. Investment linked policies (ILP)
There are certain variations of this plan, but the most common ILP can be broken into 2 parts: a yearly renewable term life insurance and an investment plan. For the first few years, a large portion of the premiums paid will be used to renew the insurance policy while a smaller portion will purchase a few units of investment funds depending on your risk appetite. See below for a simple illustration:
*Picture from moneysense
- ILPs are more flexible compared to Whole Life and Term plans as they allow us to adjust our insurance coverage as required (Increasing may be subjected to underwriting).
- Unlike Whole Life plans, we are allowed to decide which funds to purchase based on our risk appetites. It could potentially give you higher returns than a savings plan.
- These plans often come with an option of selling part of our investment portfolio to pay off the premiums for that year.
- ILP is not like any whole life or endowment plan. It does not have any cash value. Just like any investor’s portfolio in the stock market, the value of the investment portfolio will vary from time to time depending on the performance of the funds we purchase.
- The insurance portion renews every year. As we age, we are more vulnerable to diseases and disabilities. This causes the insurance premium to slowly escalate as we renew each year.
- In the event if the investment projections don’t go as planned, it is possible to encounter a situation where our investment funds are no longer sufficient to renew the insurance portion, forcing us to decrease our coverage to lower the cost to renew.
Should you be getting an ILP?
Before you sign up for an ILP, consider these factors:
- Are you willing to take the risk of not having guaranteed returns on your investments?
- Does an ILP fit your investment style and risk profile?
- Are you adequately covered by other policies in the event your units in investments aren’t sufficient and you have to lower your coverage?
Will I be getting an ILP?
For me, no. The premiums are just too expensive given my annual income (the ones I’ve seen costs $3k/year, more than all my policies combined and it doesn’t give me half of my current coverage). Yes, there is an investment portion which may potentially give me higher returns. But with every investment comes risk. I’m not a big fan of renewing my insurance, paying higher cost of insurance as I age and risking my coverage just for a chance of getting higher returns. Also, I’m still young and I prefer to manage my own portfolio. ILP doesn’t fit my investment style and risk profile.
In the future, when I start writing on the third layer of wealth “Long term Investments”, I’ll show you that it is possible to build wealth and beat inflation in a safe and risk-free manner.
- Do not tunnel vision & spend too much on one type of insurance and neglect the others (e.g: spending 3k/year on a Whole Life insurance + Critical Illness rider without covering yourself with hospitalisation, disability income and personal accident)
- Have a good balance between each type of plan and spend within your limits. Don’t forget: General rule of thumb is to insure yourself with 5-10% of your annual income.
Before I finish…
Most of you must be wondering how many % of my annual income do I spend on insurance. My current premiums cost exactly 7.28% of my annual take home salary.
I currently own:
- Integrated Shield plan + Co-insurance + Deductibles rider
- Term Life insurance + Multi CI + Early CI rider
- MINDEF group insurance
- 3x Whole life my parents got me, 2 of which matured and I don’t have to pay a cent
- Personal accident plan
- Disability income insurance
Right now, I’m helping some of my friends sort out their insurance and personal finance. If you have any questions with regards to them, I’m willing to help you as long as it’s within my limits. You may drop me an email at email@example.com or PM me at https://www.facebook.com/thefivelayers. I do not have any products or services to sell so I’ll just help you to the best of my abilities.
Lastly, shout out to feedspot for featuring my blog as the top 100 retirement blogs. Have a good day and happy building your layers!
*Featured image from Hamilton Leonard