Insure early for lifelong security
This article was first published on The Straits Times on 16th January 2022.
Mr Dionysius (not his real name) was in his late teens when he made his first insurance decision — to top up coverage for a plan offered to all full-time national servicemen.
“I was a bit kiasu (fear of losing out). I didn’t know what could happen to me during national service, so I wanted to be insured for a larger sum,” he says.
Now 25, the engineer started looking deeper into managing his financial future when he was in university.
“I realised that personal finance was not just about picking stocks and funds, it was also about insurance, about housing, etc.”
For young working adults, or those who are just about to enter the workforce, insurance is a tool that helps individuals “level up”, he says, borrowing an analogy from video games.
It transfers some risk from the insured to the insurer to minimise the impact when life takes an unexpected turn.
“It’s like arming yourself with a fire extinguisher so you can prevent the spread of the fire when it happens.”
An important aspect of having a financial plan is to mitigate longevity, inflation and healthcare costs, says DBS Bank’s head of financial literacy, Ms Lorna Tan.
“As such, insurance protection is an important component of a holistic financial plan as it prevents your plan from being derailed and helps you achieve financial resilience.
“It also ensures that your loved ones are protected from unseen risks like losing a home or loss of income due to premature death, prolonged hospitalisation, or a major illness,” she says.
How much should I set aside?
In financial planning, DBS recommends saving 10 per cent or more of one’s monthly income, having at least three to six months of emergency cash, adequate insurance and investing in suitable products to achieve financial wellness.
You can use the DBS NAV Planner on the bank’s digibank app to review your financial goals via a comprehensive plan and close your gaps, or speak to a wealth planning manager.
An emergency fund can help you tide over unexpected and urgent situations, like losing a job or falling severely ill. But even with an emergency fund in place, says Mr Ian Hutchinson, general manager at financial comparison platform SingSaver, unexpected health issues can be financially devastating.
Insurance is thus needed. Mr Tan Chin Yu, a client advisor at wealth advisory Providend, says: “The role of insurance is to take care of ‘low probability but high impact’ events such as severe illness or death.
“It is critical to ensure that we are adequately protected against events that have severe financial impact.”
What insurance should I get?
Experts suggest five main types of coverage that young working adults should look at.
Health insurance (MediShield Life and Integrated Shield): These take care of your medical expenses in the event of hospitalisation and ensure that you will be able to afford the medical treatments you need.
All Singaporeans are covered under MediShield Life, which helps pay for large hospital bills in highly subsidised wards in government hospitals as well as some costly outpatient treatments, such as dialysis and chemotherapy for cancer.
If you have other healthcare expectations or prefer the option of seeking treatment in higher-class wards or private hospitals (where the wait to be treated is sometimes shorter), you should consider enhancing your MediShield Life coverage with an Integrated Shield plan.
You should also consider getting riders, which are optional add-ons that offer additional benefits. Riders can also be used to reduce the amount that you must pay out-of-pocket, such as co-insurance and deductibles when you are hospitalised.
Life insurance: Life insurance such as a term policy is especially important if you are providing for loved ones such as ageing parents, young children or an unemployed spouse.
You should purchase sufficient coverage to support their living expenses and pay off any outstanding loans in the event of your death.
Premiums for such plans are typically lower when you are younger so start early.
Critical illness: The Life Insurance Association recommends being insured for five years of expenses against critical illnesses. Five years is the average time it takes to recover from serious illnesses.
A critical illness plan typically pays a lump sum amount if you are diagnosed with an illness covered by your policy.
Sometimes, the payout can be used to pay for alternative treatments that are not covered by your health insurance.
Ninety per cent of all severe stage claims received by life insurers in Singapore are for five critical illnesses: Major cancer, heart attack, stroke, coronary artery bypass surgery and end-stage kidney failure.
Disability income: These plans protect your income, to some extent, if you are no longer able to work due to disability from illness or accident.
A good guideline is to have disability income insurance that pays out up to 75 per cent of your current monthly income until your planned retirement age.
Personal accident: Personal accident plans protect you from medical expenses and loss of income that arise from an accident, such as when you break a leg while trekking.
With Manulife’s ReadyProtect, for instance, you are refunded for medical care received in case of accidents, including ambulance fees, mobility aids, and traditional Chinese medicine. You also get covered for up to 21 infectious diseases, and if you are a victim of an act of terrorism.
In the case of accidental death and dismemberment, you get a payout ranging from $50,000 to $1 million.
Providend’s Mr Tan recommends considering term insurance plans that protect you for a fixed period, so you can adjust your total amount of coverage as your life stage changes.
The premiums for term plans are less expensive than plans that cover you for your entire life, and allow more freedom to invest in other areas.
Always review plans annually, says SingSaver’s Mr Hutchinson. “This is especially crucial if there is a change in your life stage and/or if you require more coverage due to changes in circumstances.”
After having covered your basic insurance needs, you can consider wealth accumulation insurance that helps you grow your assets, among other investment tools. They include endowment insurance and investment-linked insurance plans, says DBS’ Ms Tan.
This is the second of a five-part series on insurance.
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Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.
All investments come with risks and you can lose money on your investment. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single product issuer.
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