Why do we need insurance


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The younger you start purchasing your insurance, the lesser premiums you pay than if you are older.

There are various protection plans you can consider when you first start out.

Determine your needs first and understand your options before purchasing protection plans.

Ever wondered why financial advisors typically encourage you to get protection coverage when you're young and healthy? That's because insurance premiums increases with age.

When you buy insurance when you're younger, you pay significantly less total premiums for the same coverage than if you were older. Yes - you pay less on an annual basis, and in total (for the entire time you're paying for coverage). In addition, insurers also tend to exclude coverage for pre-existing health conditions. And... the younger you would probably have fewer aches and conditions than older you.

Here's an example of the total premiums paid at each entry age point:

What you should consider when you first start out

Have you just landed your first job? Looking to guard against high hospital bills, or save more for a rainy day? Here are the plans you may want to consider.

A term/life insurance ensures a lump sum pay-out in the event of death or terminal illness, sometimes it also covers for total permanent disability. You can choose to add on additional critical illness riders to provide coverage in the event of a diagnosis of a covered critical illness such as heart attack or cancer. This can help you with medical and living expenses as treatment for such illness are often costly and may affect your work and income stream whilst recovering.

For a more holistic coverage, a personal accident insurance provides a pay-out to you and your loved ones in the event you meet with an accident and incur medical expenses or if you pass away or become permanently disabled due to an accident.

Hospitalisation policies are specific plans to help you settle costly surgery bills. They have rider options, or enhanced benefits at additional premiums, to cover your portion of the bill known as 'co-insurance' and 'deductible'.

Some policies also give you a small amount in cash for time spent in hospital, to cover any loss of income during the period.

A plan with critical illness coverage pays you a lump sum in the event of a serious illness such as cancer, to help you with expenses.

Other healthcare plans cover doctor visits and emergency treatment, as well as longer-term care in the event of disability.

Some people opt for these plans that pay out a guaranteed amount of cash upon maturity after a number of years, typically ten or more.

The policies also provide some measure of protection, such as against critical illnesses, total and permanent disability and death.

Endowment plans are available as participating policies, which have guaranteed as well as non-guaranteed benefits.

The guaranteed portion, or sum assured, is paid when the policy matures or the insured person dies.

The non-guaranteed portion typically comprises annual dividends in the form of a cash bonus, that come from participating in the profits of the insurance company, or the funds it invests in. 

Are you getting married, or have a child on the way? Would you want to ensure your family continues to thrive if you're no longer around?

Life insurance is an option for those who are the family's key earner, or who have elderly parents or children to support. Such policies typically pay out the sum assured to your dependents, should you be disabled, critically ill, or no longer around.

Such policies are available as term insurance, whole life insurance and universal life insurance.

Term insurance are policies that provide coverage for a fixed period. It pays the sum assured only upon the total and permanent disability, or death, of the insured person during this period.

Whole life insurance on the other hand is a long-term plan convering the insured person's life or up to 99 years. It also accumulates cash value. Such a plan pays out a sum of money upon the death of the policyholder, or when the policy is surrendered.

Universal life insurance is typically a term plan that has a savings element. It helps you plan for your legacy - a continued income for your family or inheritance for your children. 

There are also endowment plans aimed at helping you save for your child's further education costs.

Other options are investment-linked policies, which means you are investing part of your premiums in a fund, or funds, picked by the insurer or a third-party fund manager. 

However, these tend not to have a guaranteed value and you are responsible for the investment risks.

Your payout at the end of the policy's term could potentially be less than the sum of the premiums you've paid over the years.

And if you have a mortgage on your home in your name, you could also consider taking out mortgage term reducing insurance, a form of decreasing term insurance where the sum assured declines over time. This helps to pay off your home loan upon death.

Consider how many people you have to support and how old they are before you decide how much life insurance to purchase; you would not need as much insurance if your children are ready grown up.

One option to consider are annuities. Such plans pay out a fixed amount at regular intervals for a fixed period, or during the lifetime of the policyholder. CPF's Lifelong income for The Elderly (CPF LIFE) is one such annuity scheme taken from your CPF Retirement Account funds. You'll get a sum of money each month, for as long as you live, once you reach the eligible age.

There's the option to defer the payouts till a later age, and for each year of deferment the monthly payouts increase by about 6% - 7%. Or you could choose to draw less money monthly and reserve the funds for your dependents instead.

The bottomline

It is quite possible to pick up any policy to save up or insure yourself against all sorts of risks at any point in your life. But determine your needs first and understand your options, and buy only as much insurance as you need and can afford. 

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