Insurance planning deserves a special mention in this investment blog, because it underpins all good personal investments. This is perhaps one underlying aspect that is usually overlooked when one talks about investment. When struck with a unforeseen crisis, without adequate insurance planning, even the most outstanding investor will have to liquidate his precious golden egg and all gains will vanish before his very eyes. Therefore, it is of utmost importance that one ensures that he has arranged for sufficient coverage before embarking on any investing venture to build his nest egg.
I will briefly cover a few key aspects and share my perspectives on insurance and basic financial planning. I do not claim to be a financial planning or insurance expert, but I believe the below pointers I have to share are what experts will probably advise you too.
Disclaimer: What will be expressed here are the views of an author, who is definitely not a financial planner or insurance agent. The views are not completely exhaustive and only to the best of the author's knowledge. Readers are strongly advised to seek the services of a specialised insurance agent or financial planner.
Insurance: Intent
The primary intent of insurance is about the preservation of you and your family's state of financial well being when something unfortunate strikes. Preservation of financial well being meant you will not have the need to vastly alter your state of finances, i.e. liquidate stocks/funds, take loans, or worse still, sell your physical assets to pay for medical bills or to sustain the expenses required to maintain your family's current quality of life. The bottomline for preservation of financial well being is that your finances must not be unduly stressed when crisis strikes.
Now, the secondary intent of insurance is that it can also serve as a form of low risk savings planning. For basic life insurance, the yearly premiums that you have paid will accumulate a cash value within your policy. At a certain stage in your life, you can choose to surrender the policy for a lump sum of cash if you feel that you are more than sufficiently covered. In addition, there are more complex insurance products like endowment/savings policies, which you can pay a regular annual sum towards a plan to distribute either a steady stream of income, or allow you to encash a lump sum at different stages in your life. For example, you can get an insurance that gives you a lump sum, or activate a steady stream of income when you hit 40, 50 and 60 years old. You can also look out for insurance instruments that are like savings plans for you to encash an amount when your child needs a lump sum for his tertiary studies.
The question is: do you want to see insurance as purely an expense, or a form of savings as well? Usually, the general public's answer (which makes sense) is a middle between both extremes: they normally view insurance as a form of retirement planning which provides a certain amount of coverage still.
Scope of insurance coverage
I will briefly cover a few key aspects and share my perspectives on insurance and basic financial planning. I do not claim to be a financial planning or insurance expert, but I believe the below pointers I have to share are what experts will probably advise you too.
Disclaimer: What will be expressed here are the views of an author, who is definitely not a financial planner or insurance agent. The views are not completely exhaustive and only to the best of the author's knowledge. Readers are strongly advised to seek the services of a specialised insurance agent or financial planner.
Insurance: Intent
The primary intent of insurance is about the preservation of you and your family's state of financial well being when something unfortunate strikes. Preservation of financial well being meant you will not have the need to vastly alter your state of finances, i.e. liquidate stocks/funds, take loans, or worse still, sell your physical assets to pay for medical bills or to sustain the expenses required to maintain your family's current quality of life. The bottomline for preservation of financial well being is that your finances must not be unduly stressed when crisis strikes.
Now, the secondary intent of insurance is that it can also serve as a form of low risk savings planning. For basic life insurance, the yearly premiums that you have paid will accumulate a cash value within your policy. At a certain stage in your life, you can choose to surrender the policy for a lump sum of cash if you feel that you are more than sufficiently covered. In addition, there are more complex insurance products like endowment/savings policies, which you can pay a regular annual sum towards a plan to distribute either a steady stream of income, or allow you to encash a lump sum at different stages in your life. For example, you can get an insurance that gives you a lump sum, or activate a steady stream of income when you hit 40, 50 and 60 years old. You can also look out for insurance instruments that are like savings plans for you to encash an amount when your child needs a lump sum for his tertiary studies.
The question is: do you want to see insurance as purely an expense, or a form of savings as well? Usually, the general public's answer (which makes sense) is a middle between both extremes: they normally view insurance as a form of retirement planning which provides a certain amount of coverage still.
Scope of insurance coverage
The four key areas that must be covered are: death, disability, critical illnesses, hospitalization. These are four areas that will deal the biggest blow to anyone's finances if not appropriately covered. I think it is of paramount importance that anyone make sures that these four areas are well covered.
The fifth area of 'accident coverage' is optional and dependent on whether you operate in an environment that constantly exposes you to a range of possible work related injuries. And if your agent advises you that there will be no way that you will be able to claim under any current insurance plan, and you have some spare cash, you might want to consider putting away any possible financial worries arising from such little accidents. These injuries should not be life threatening or require you to undergo intensive operations, but significant and frequent enough to frustrate you from saving up to build that lovely golden nest egg.
Assured Amount: the Four dimensions
The next consideration about insurance is on the assured amount. What is the rule of thumb to decide on the sum assured? If you pass on, what is the amount you want to leave behind for your loved ones? If you turn disabled, what is the income you want to regularly generate for your family? If struck with a critical illness, what is the lump sum you need to cover for all the medical fees?
Death: Ideally, we hope to be able to maintain our family's quality of life for the next 20 years, this timeframe is definitely good enough to finance my children towards independence and my family to adapt to my absence. But to the average Joe (which is me) who earns the average income, this is unrealistic. We may want to revise our targets down then, 10 years worth of expenses probably? Let's look at a few case studies on how you can compute your sum assured: for the singles like me (ladies, you are welcomed to drop me a message), who contribute a monthly 'piety' sum to my parents, I will want to preserve this monthly payout for a good 15 years if I have to pass on. Then I use this to work backwards to determine on my desired total sum assured, and work out a sum that my current income will be able to sustain. If I have a family to feed, I will estimate an average annualised expense and project it for 'X' years ahead, X being a variable that depends on how much I can reasonably afford to fork out now.
Disability: Now let's take another perspective on sum assured: What if the person enters a situation whereby life deals a blow that leaves him income-less, but fully conscious and disabled? Well, he is still there, and his family needs money and he needs money to go on. Insurance plans with disability income comes in here. It is hard to pin a figure on how much is enough, because the family will have to be realistic and adjust downwards their quality of life. Given current standards of living, a good figure to grasp with is S$10,000 per annum (or about 1k per month) of disability annual income with probably a one lump sum payout. I think with this sum of disability income, one will be able to sustain a very basic standard of living without putting undue strain on the family.
Critical Illness: Statistics reveal that usually the median of the cost of one time medical cost for the the most common critical illness is around S$50,000. Critical illnesses strike hard on finances and when it comes, the bills come fast and furious in immense sums. No one will want to have to sell their family's dwelling or take on a bank loan to pay for those bills.
Hospitalisation: These fees do not kill your finances; but the monthly bills of 2k or 3k and more due to treatment and long term hospitalisation will bleed anyone's bank dry. The Singapore Government provides us with a Medishield that is partly and mandatory funded by our monthly income. This is a good plan, but the amount and coverage is somewhat lacking. It is good to consider hospitalisation insurance plans that enhance your coverage further. The costs are affordable, and recommended to ensure you do not sell away a Warren Buffett share to pay for these hospitalisation bills.
Investment-Linked Plans
There are also many insurance linked plans. These plans provide you with a certain coverage, but your cash premiums are invested in mutual fund products e.g. "Asia Pacific Growth Fund". These plans can probably yield higher returns. If you ask me as a matter of opinion, I would recommend for anyone to have a clean segregation between what is meant for insurance and what is meant for investment. For insurance, you want a fuss free, low risk and high confidence on a strong shield for your finances. For investment, you are looking at higher risk, for higher returns. Mixing both up in mumbo-jumbo plans complicate anyone's financial planning.
Term Life Insurance
Term life insurance is a cheap form of life insurance. The difference being that it holds no cash value. It only provides coverage for a specified term (say 1 year, 5 years, etc), therafter, the insured personnel can choose to renew the policy but pay much higher premiums. The intent is a pure death benefit to provide coverage for the insured, so the immediate premium price is much lower. If you talk to an insurance agent, and compare the premiums against that of a whole life insurance, it is generally true that the premium for term life will escalate significantly compared to a whole life over a period of time. If you ask me, I would recommend from a layman's perspective that one should go for a whole life insurance, where the annual premiums are fixed and correlative to your age (i.e. lower your age, cheaper the annual premium, and have a cash value at the end, with a similar coverage).
However, there can be situations where term life insurance fits your insurance planning. For example, SAF offers a Group Term Life insurance that covers until 70 years old, where a S$600 annual premium can provide you approx. S$100k coverage. You may decide to have a clear segregation between your retirement planning and insurance, and you see your insurance as a form of expense. In addition, you do not desire to have a death benefit beyond 70 years old because you believe that your dependents' quality of life will no longer depend on you anymore then. In this situation, buying a term insurance fits your designated outcome.
For the experts and insurance savvy ones, you may hold a different view. YMMV.
Completing your 'shield'
In addition to insurance, it is highly recommended for anyone to set aside a sum that is worth at least 6 months of income to buffer against any change to your current level of income. We function in a global economy where matters are eternally in a state of flux; there's no way we are able to guarantee that our current income level will not be disrupted by a loss of employment or loss of income. I think 6 months is a reasonable timeframe for anyone to pick himself up after enduring such a blow. And once you are done with all these preparation work, you can say that you shield is more or less complete, and that you can start embarking on your investing venture.
Final Remarks
I have broadly covered on aspects in insurance planning and building a strong shield in finances. It's not exhaustive, but I have shared will probably rev up the layman with a good ground to start with.
If you have thought nothing about insurance and have been obsessed with investing every single penny to surpass Warren Buffett, (like I was in University days), my dear friend, it is time to rethink again.
The fifth area of 'accident coverage' is optional and dependent on whether you operate in an environment that constantly exposes you to a range of possible work related injuries. And if your agent advises you that there will be no way that you will be able to claim under any current insurance plan, and you have some spare cash, you might want to consider putting away any possible financial worries arising from such little accidents. These injuries should not be life threatening or require you to undergo intensive operations, but significant and frequent enough to frustrate you from saving up to build that lovely golden nest egg.
Assured Amount: the Four dimensions
The next consideration about insurance is on the assured amount. What is the rule of thumb to decide on the sum assured? If you pass on, what is the amount you want to leave behind for your loved ones? If you turn disabled, what is the income you want to regularly generate for your family? If struck with a critical illness, what is the lump sum you need to cover for all the medical fees?
Death: Ideally, we hope to be able to maintain our family's quality of life for the next 20 years, this timeframe is definitely good enough to finance my children towards independence and my family to adapt to my absence. But to the average Joe (which is me) who earns the average income, this is unrealistic. We may want to revise our targets down then, 10 years worth of expenses probably? Let's look at a few case studies on how you can compute your sum assured: for the singles like me (ladies, you are welcomed to drop me a message), who contribute a monthly 'piety' sum to my parents, I will want to preserve this monthly payout for a good 15 years if I have to pass on. Then I use this to work backwards to determine on my desired total sum assured, and work out a sum that my current income will be able to sustain. If I have a family to feed, I will estimate an average annualised expense and project it for 'X' years ahead, X being a variable that depends on how much I can reasonably afford to fork out now.
Disability: Now let's take another perspective on sum assured: What if the person enters a situation whereby life deals a blow that leaves him income-less, but fully conscious and disabled? Well, he is still there, and his family needs money and he needs money to go on. Insurance plans with disability income comes in here. It is hard to pin a figure on how much is enough, because the family will have to be realistic and adjust downwards their quality of life. Given current standards of living, a good figure to grasp with is S$10,000 per annum (or about 1k per month) of disability annual income with probably a one lump sum payout. I think with this sum of disability income, one will be able to sustain a very basic standard of living without putting undue strain on the family.
Critical Illness: Statistics reveal that usually the median of the cost of one time medical cost for the the most common critical illness is around S$50,000. Critical illnesses strike hard on finances and when it comes, the bills come fast and furious in immense sums. No one will want to have to sell their family's dwelling or take on a bank loan to pay for those bills.
Hospitalisation: These fees do not kill your finances; but the monthly bills of 2k or 3k and more due to treatment and long term hospitalisation will bleed anyone's bank dry. The Singapore Government provides us with a Medishield that is partly and mandatory funded by our monthly income. This is a good plan, but the amount and coverage is somewhat lacking. It is good to consider hospitalisation insurance plans that enhance your coverage further. The costs are affordable, and recommended to ensure you do not sell away a Warren Buffett share to pay for these hospitalisation bills.
Investment-Linked Plans
There are also many insurance linked plans. These plans provide you with a certain coverage, but your cash premiums are invested in mutual fund products e.g. "Asia Pacific Growth Fund". These plans can probably yield higher returns. If you ask me as a matter of opinion, I would recommend for anyone to have a clean segregation between what is meant for insurance and what is meant for investment. For insurance, you want a fuss free, low risk and high confidence on a strong shield for your finances. For investment, you are looking at higher risk, for higher returns. Mixing both up in mumbo-jumbo plans complicate anyone's financial planning.
Term Life Insurance
Term life insurance is a cheap form of life insurance. The difference being that it holds no cash value. It only provides coverage for a specified term (say 1 year, 5 years, etc), therafter, the insured personnel can choose to renew the policy but pay much higher premiums. The intent is a pure death benefit to provide coverage for the insured, so the immediate premium price is much lower. If you talk to an insurance agent, and compare the premiums against that of a whole life insurance, it is generally true that the premium for term life will escalate significantly compared to a whole life over a period of time. If you ask me, I would recommend from a layman's perspective that one should go for a whole life insurance, where the annual premiums are fixed and correlative to your age (i.e. lower your age, cheaper the annual premium, and have a cash value at the end, with a similar coverage).
However, there can be situations where term life insurance fits your insurance planning. For example, SAF offers a Group Term Life insurance that covers until 70 years old, where a S$600 annual premium can provide you approx. S$100k coverage. You may decide to have a clear segregation between your retirement planning and insurance, and you see your insurance as a form of expense. In addition, you do not desire to have a death benefit beyond 70 years old because you believe that your dependents' quality of life will no longer depend on you anymore then. In this situation, buying a term insurance fits your designated outcome.
For the experts and insurance savvy ones, you may hold a different view. YMMV.
Completing your 'shield'
In addition to insurance, it is highly recommended for anyone to set aside a sum that is worth at least 6 months of income to buffer against any change to your current level of income. We function in a global economy where matters are eternally in a state of flux; there's no way we are able to guarantee that our current income level will not be disrupted by a loss of employment or loss of income. I think 6 months is a reasonable timeframe for anyone to pick himself up after enduring such a blow. And once you are done with all these preparation work, you can say that you shield is more or less complete, and that you can start embarking on your investing venture.
Final Remarks
I have broadly covered on aspects in insurance planning and building a strong shield in finances. It's not exhaustive, but I have shared will probably rev up the layman with a good ground to start with.
If you have thought nothing about insurance and have been obsessed with investing every single penny to surpass Warren Buffett, (like I was in University days), my dear friend, it is time to rethink again.
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