The complete guide to planning your insurance

I have spoken before about the Financial Planning Triangle. Basically, we need to have protection first before wealth accumulation. Insurance is the bedrock of the triangle, where one needs to have protection before one can try to grow his or her wealth.

It might be a little scary on planning your own insurance. So, in this post, I will be showing you how you can get the calculations, so that you will not get tricked by any dishonest financial advisers out there. More specifically, I will be showing you:

  • What are the various types of insurance?
  • How do I calculate the amount needed?
  • What insurance do I need?

The various types of insurance

Singaporeans have insurance for everything, from term life to whole life and then to investment-linked policies. As a fact, many Singaporeans are overinsured. Truth be told, insurance can be easily classified into three types: life insurance, health insurance, and general insurance.

Life insurance

Life insurance
Life insurance is about paying out a sum of money, or otherwise known as the sum assured, upon certain events. Such events include death, critical illness, permanent disability, or long-term care. The purpose of life insurance is to protect against a loss in income, when one is no longer able to work.

Death or total permanent disability
For example, if the sole breadwinner of a family suddenly passes away, the family would need a sum of money to maintain their current standard of living. The money can be used to pay off existing debts, save for one's children's education, and to provide for household expenses until the children are financially independent.

In this case, we have to work out how much is the sum assured for our insurance policy. We take the annual income of the insured multiplied by the number of dependent years. The dependent years is the time taken for the youngest child to become financially independent and support the family. For male children, take 25 minus the child's current age, while take 22 for female children.
If a person has a son aged 10 and a daughter age 8, then the dependent years for the son will be 15 while the daughter's will be 14. The insured shall take 15 years which is the higher of the two. The product of the annual income and dependent years shall become the sum assured in the event of death of the insured.

Critical illness
For critical illness, the logic is that the insured has a couple of years to fight the illness, and after which he might return to work, or might fall to the illness. In this case, it is then reasonable to provide for an extra amount on top of death coverage, because of the financial need to spend to recuperate from the illness.


The cost of fighting a critical illness ranges from $100,000 to $200,000. A cover for critical illness is usually $150,000 above the sum assured for death. Some might have heard that upon being diagnosed with cancer, they are unable to claim for critical illness, and thus have no money to recuperate.

Note that critical illness only covers for stage 3 and 4 cancer, where the chances of recovery is low. One should also purchase an early critical illness cover, where the chances of recovery is very high. He or she can be assured of having the financial means to recover from the illness. Early stage critical illness is usually sold as a rider or sometimes as a standalone plan as well.

Types of life insurance products

Today, there are many products, and they come with many different names. But, life insurance products can be broadly classified into these four categories: term insurance, whole life insurance, endowments, and investment-linked products. Let me explain each of them.

Term insurance
The name term insurance is derived because it lasts for a term. You can choose the period of coverage, for instance 10 years, 20 years, and so on. Term insurance is also known as a plain vanilla insurance, which only provides you with the sum assured upon the occurrence of certain events, such as death, critical illness, or total permanent disability.
There are 2 main advantages to term insurance. The first is flexibility. We only pay for the period that we need the insurance. For instance, let's say we have assumed that one's children have 20 more years till they become financially independent. Then, we only need term insurance to cover us for 20 years.

The second advantage is cost. Term insurance is much cheaper than other forms of insurance, because you are only paying for the insurance portion, and not for add-ons such as investments or savings. You can go on to invest this savings in cost, leading to the strategy of buy-term-and-invest-the-rest.

Whole life insurance
The opposite of term insurance would be whole life insurance. Whole life insurance covers and insures you for life. Besides paying a premium for the insurance cover, you also pay extra towards an investment portion. The money will then be put into investments, at the discretion of the insurer.

This gives rise to a case value that term insurance do not have. The case value is also the amount of money that you can receive if you would like to terminate your policy early. Regarding the investments, rates of 3.75% and 5.25% per annum are assumed in their benefits illustration, but there is no certainty or guarantee that the rates would be achieved.

Endowments
Endowment plans are part savings and part insurance, although it is more savings than insurance. The basic concept behind endowments is that you regularly put in a sum of money and pass it to the insurer. This accumulation period is usually long, and the returns hover around 3%. For instance, one can pay for 15 years, and receive a return of 3% per annum after the 15 years have passed.

However, the rate that is shown is not fully guaranteed. For instance, in the example of 3%, one part of it might be guaranteed, say 1%, and the other is non-guaranteed and depends on the economic circumstances surrounding the insurer.
During this 15 years, if one were to meet with a mishap, for instance death or total permanent disability, there will also be a payout given. Thus, it is part savings and part insurance. The main draw of endowments is that they help people to save. Especially for spendthrifts, endowments force them to save away a portion of their income.

Investment-linked products
Investment-linked products or ILP have received a lot of criticism these days. It is similar to whole-life insurance, but the main premise of ILPs are to provide good returns to the insured. The premiums paid are split into two parts, one to pay the insurance premium, and the other to channel into investment funds.

For the investment portion, one is able to choose his or her desired fund allocation. It is hoped that over time, the investments would generate a high level of returns. For the insurance premium, it is paid by deducting units from the investment fund. For instance, to pay an insurance premium of $100, 10 units worth $10 each would have to be taken away from my fund.

The main disadvantage of ILP is that the insurance premiums rise up very drastically as one grows old. It is possible that there is not enough value in the investments to pay for the insurance, and one's insurance cover might have to drop. Another disadvantage is the costs involved, where there is usually a 5% upfront sales charge, and recurring management fees of around 1%.

Health insurance

Health insurance is a definite must-have for anybody. Fortunately in Singapore, our healthcare is affordable. Yes, it is affordable if you compare to other countries where healthcare is either of lower quality, or more costly, or involve more waiting time.

In Singapore, we are fortunate to have MediShield, which means that whenever we get hospitalised and undergo surgery, we need only pay a portion of the entire bill. The parts we pay are known as the deductible and co-insurance. The MOH website has a good clear explanation of how it works.


MediShield allows you to visit restructured hospitals, which are what we usually call public or government hospital. If you were to go to a private hospital or stay in a higher class ward in government hospitals, MediShield will only cover a portion. That is why we usually buy shield plans from the big 5 insurers: AIA, NTUC Income, Prudential, Great Eastern, and Aviva.

With the shield plans, one still needs to pay for the deductible, and 10% of the co-insurance. In order not to pay for these two, one can also purchase a rider add-on. You pay more per month but get a piece of mind. Shield plans can be paid by Medisave but the riders have to be paid in cash.

General insurance

Anything that doesn't fall into life insurance and health insurance falls under general insurance. General insurance basically covers everything else. General insurance might include protection for:

  • Property
  • Vehicle
  • Travel

Property insurance
The most important form of property insurance is mortgage insurance. When the owner of the house passes away, he or she would not want the rest of the family members to bear the mortgage payments. Thus, mortgage insurance protects against this. Mortgage insurance helps to pay off the entire mortgage if the insured passes away.

For all HDB flats, flat owners are automatically insured under the Home Protection Scheme. According to the CPF website, the HPS is a mortgage-reducing insurance that protects members and their families against losing their HDB flat in the event of death, terminal illness or total permanent disability. HPS insures members up to age 65 or until the housing loans are paid up, whichever is earlier.​


However, for private property, one might consider taking on mortgage insurance to pay off the mortgage if one meets with an unforeseen event. Or, one can simply increase the sum assured in his or her life insurance policy and do away with the mortgage insurance altogether. The only difference is that mortgage insurance are usually mortgage-reducing which means that the sum assured and premiums decrease over time as the mortgage falls, while life insurance has a fixed sum assured value.

What insurance do I need?

There is no need to insure for everything. The things we should insure are events which are either high probability events, or a catastrophic event. A high probability event is an event which has a high chance of happening. For instance, if one's family has a history of cancer, it is advisable that one has an insurance for critical illness. Other high probability events include hospitalisation, surgery, and accidents.


A catastrophic event is an event that can potentially wipe out a large chunk, if not all, of one's finances. Death is such an event. The death of one brings about much sorrow but also leaves behind many financial obligations if he or she is the sole breadwinner or an income earner. Other events that are catastrophic include critical illness, and total permanent disability.

For events that are both unlikely to occur, and have little or no financial implications even if they happen, we do not need to insure for them. This will prevent us from being overinsured. There is a good article that talks more about life stage planning.

Conclusion

Insurance is a definite must-have for all of us, but the extent of coverage depends on each individual. I want to make this a comprehensive guide for insurance, and I will be constantly updating this post. If you have any area of insurance that you want more information about, and I have not covered in here, please leave a comment below and I will add it in. Hope this guide can help you plan your insurance better.
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Wicky
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17 May 2017 at 02:31 delete

Thanks for posting good helpful information. Please refer to
http://01privatehealthinsurance.blogspot.com/ to find out more about
private health insurance - private health insurance

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Gowri Sharma
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6 July 2017 at 20:37 delete

Thank you so much for posting like this. I enjoyed much more here. So please keep update like this.

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