02 April, 2015
An Overview of Buying Insurance
This is an overview of my philosophy for wealth management using insurance. The ideas here can be used by anyone for their own estate planning. This is not brand or product specific. One of the things we realise is that our clients are generally at one of four life stages and these determine their financial needs. There are five types of insurance plans.
At the first stage, people are young and single. Within the Singapore context, the women would have just started their career and the men would be in National Service. This is the period of wealth accumulation and liability protection. At this stage, you would want to protect your earning capacity.
The very first plan that you should buy is a health plan. A shield plan is the most basic insurance plan and it is the foundation of financial planning. A hospitalisation plan is the one plan that everyone has an opportunity to claim. It cannot be that you never fall sick. A basic shield plan can be paid out of your Medisave. It is extremely cheap, and it is worth it. This means that your coverage is immediately increased from whatever your Medisave has to up to a limit. If you can afford it, always get the highest plan. It does not cost much more, and when you fall sick, you do not want to be stuck in a C ward if you have options.
The limitation of this plan is that it only covers up a percentage of the cost of a hospitalisation or treatment in the schedule. It does not include co-insurance and deductibles. It means, you still have to come up with some money. If you are able to come up with the cash, and that can be just over $30 monthly, buy the enhanced plan. This covers all co-insurance and deductibles. You do not have to come up with any money when you go to hospital.
In tandem with getting a hospitalisation plan, you should get a personal accident plan. This affords you reasonable coverage in the event of an injury. Like the hospitalisation plan, get it when you are young, before you have any injuries or medical problems. Too many people regret it after they have to go for treatment without any coverage and then discover, when they want to buy a plan, they have a pre-existing condition and there is an exception that is not covered for the rest of their life.
A personal accident plan is extremely cheap, and can provide a quarter of a million coverage at much less than $50 a month. Buying this and an enhanced shield plan at a young age is not going to cost you more than $60 a month for the average person.
For those who work in a career where their earnings depend on them being there, such as taxi-drivers, sole proprietors and such, it is worth your while to consider a hospitalisation benefits plan. This is the second category of insurance. Unlike the plans mentioned previously, this plan puts money in your pocket should you be hospitalised, daily. Some pay a pre-determined amount per day over a series of days for hospitalisation, operation, and pre- and post-operation stays. Depending on the amount paid out, the premiums can vary from the cheap to the expensive. How much do you think your time is worth?
Once your finances are relatively stable, you have to consider the basic whole life plan. Whole life plans are the third category of insurance plans and address three main things: your death benefit, your total and permanent disability benefit and critical illness pay out. Some plans address two or all of these, and some plans are very specific, such as critical illness plans. These plans are normally a part of estate planning. Term plans also come under this category.
Good whole life plans with sufficient coverage can be expensive. But they are expensive because they are worth it. By the time you are ready to buy your won series of life plans, you are likely at the next stage of your life. This is when you are ready to get married, to have your own place, and to consider measures to further your career. You are no longer planning for one, but two.
At the very least, get a whole life plan with total and permanent disability coverage. Total and permanent disability is defined as the inability to work or live by yourself due to the loss of your use of some of your limbs and senses. To put it in a simple way, if out of your limbs and your eyes, you lose any two in any combination, you may claim total and permanent disability.
Critical illness coverage is extremely important in Singapore. At the moment, one in three people in Singapore has a critical illness, mostly cancer. Before 2020, it will be one in two. Treatment for critical illness is very expensive. And critical illness plans are needed to cover that cost. Whilst a hospitalisation plan will help cover the cost of some of the treatment, it does not cover loss of income and other costs attendant to your inability to work. Surviving a critical illness requires treatment, and treatment requires money. This is that plan for that.
For those who got into insurance later, it might be prohibitive to address the whole life and investment needs at the same time. As a compromise, there are investment-linked plans. Investment-linked plans and endowment plans are excellent vehicles for wealth accumulation in anticipation of future needs. They are generally worth buying on yourself early in your life because of the mid- to long investment horizon. These are the fourth and fifth type of plans.
The third stage of life is when you have settled down and you are transitioning from the wealth protection to the wealth preservation phase of your life. This means anticipating having children and the cost of raising and educating them. You are planning your children’s future. That is your legacy.
When it comes to hospitalisation plans, the children can come under your own. And if you had the foresight to get an investment-linked or endowment plan, they would have accumulated some value. Alternatively, you may buy them now for you children’s future. Tertiary education and their settling down is a cost that can be addressed now. There are several hybrid plans with elements of whole life, endowment and investments. These are multi-generational plans that can be assigned upon your child’s maturity.
Finally, once your children have grown up, and you are winding down your career, this is the final stage of your life, which can stretch on for many decades. In general, you have reached the zenith of your earning potential and that will come to an end. Your priority is no longer wealth accumulation, but wealth preservation. You want to maintain your standard of living even though you are no longer working. This is where you start to appreciate all that money spent buying all those plans and investments earlier in your life. And this is where you put some of that money into annuities and other retirement plans. Growing old can be lonely without some financial security.
In summary, the four stages are young and single, when you plan for yourself; just married, when you plan for two; parenthood, when you plan for a family; and finally, retirement. The five types of policies are hospitalisation and accident plans, hospitalisation benefit plans, whole life plans, endowment plans, and investment-lined plans.