4 Types of Insurance Cover You Need

life buoy protectionLife is full of uncertainties and we need to always be prepared for the untoward. Doing all you can to keep your family and yourself away from financial hardship is very important. Once you have set aside an emergency fund of three to six months of living expenses, you should be seriously thinking of taking care of your protection needs. Here are the 5 types of protection we need for comprehensive insurance cover.

1. Hospital & Surgical (H&S)

If an unexpected illness or accident happens, the first costs that you will have to take care of are your hospital & surgical bills. A major illness or injury can wipe out all our Medisave funds and even our life savings. One of the most dreadful things when you are ill is deciding which assets you have to liquidate to pay the medical bills. With escalating healthcare costs in Singapore, hospital & surgical insurance is undoubtedly the most essential type of protection for anyone.

2. Disability (Income Protection)

What is your most important financial asset? This is a question I often ask people and they may initially say things like the house they own, their car, or any other investments they have. Upon further prompting, they will realise that their greatest asset is in fact themselves. It is our ability to write, speak, read and commute to and from work that allows us to make a living. The effects of disability can range from a minor and temporary reduction in income to a catastrophic lifetime loss of income. The table below sums up the different types of disability which we should cover ourselves for as a form of income replacement:

Rising in Severity (1 to 3) Disability Type Common Definitions
1 Own occupation “Unable to perform material duties of own occupation”
2 Own or similar occupation “Unable to perform any occupation which one is reasonably fitted by training, experience or education”
3 Any occupation “Total and permanently disabled and unable to engage in any occupation”

3. Critical Illness

Advanced stage

This provides a lump sum pay-out when you are diagnosed with one of 37 specific illnesses such as invasive cancers at an advanced stage. Some people believe that critical illness (CI) cover is unnecessary if they are covered by their H&S plans. However, these Medisave-approved Integrated Plans which most Singaporeans rely on are insufficient to cover all expenses due to a major illness. Our shield plans reimburse only for inpatient expenses, costs for cancer treatment such as chemotherapy and radiotherapy, and kidney dialysis. A cancer patient is commonly not warded in a hospital unless surgery is required or life support is essential towards the terminal stage of the illness. Most of the medical expenses incurred on specialist consultation, medical examination, laboratory tests and specialised cancer drugs cannot be claimed in H&S plans.

Furthermore, for someone diagnosed with an advanced stage CI, in order to recover well he/she may have to take time off work for a prolonged period of time. For working adults, the income lost due to time away from work while undergoing treatment and rehabilitation will not be compensated.

Early stage

Early stage CIs usually require a lower cost of treatment and chances of recovery will be higher than advanced stage CIs. However, if an early stage cancer patient is not warded in a hospital, it is still good to have a small amount of cover for expenses not covered by the hospitalisation plan. In addition, wouldn’t it be great if we can have the choice to stop work and rest, if we are diagnosed with an illness? We can never predict if our illness will worsen. Having an insurance pay-out allows us to take leave from work to rest and receive treatment when our illness is still at an early stage. This can enhance our chances of recovery. 

4. Death

Death cover provides a pool of funds to your spouse and dependents in the event of your untimely death, to make sure that the family that you so painstaking work for do not tumble when you are gone, and that they can continue to live life as well as they always have. Nothing can compensate the emotional loss of a loved one, but if the financial aspect is well taken care of, it makes things a little more bearable.

 

Advertisements

7 Reasons Why We Need Life Insurance

We buy life insurance as a solution to life’s problems and opportunities. In Singapore, as people become more financially literate, the percentage of us enjoying insurance protection has increased since the mid-1900s. Here are 7 reasons why we need life insurance:

1. Protection against premature loss of income

“The greater your income, the more you stand to lose. The less your income. the less your family can afford to lose.”

broken piggy bank -wipe savingsTo put it simply, we need life insurance because we may “die too soon”. Nobody knows how long one’s lease on life will run before it expires. Life insurance provides the means to ensure that an early, untimely death will not wipe out the potential income that could be used to support the family.

Insurance is particularly useful for a married man with a wife and a few young children. All his hopes and dreams of making a decent provision for his family would be dashed by one unfortunate event – death.

For just three cents, the dollar can be protected. No other financial instrument can do this so well.

2. Provision against disability

One common misconception about life insurance is that you have to die to benefit. Sometimes death could be more merciful and quick. But what if you don’t die but linger on disabled?

Would your cost of living increase? YES. Would your income continue? NO! What a terrible combination – to be alive yet not having an income, coupled with increased cost of living!

Certainly, your family can take care of you. But don’t you wish to make things easier for them by providing the means to take care of you? Sometimes, people say that if anything happens to them, their brother/sister will take care of them.

Assuming the roles are swapped, it’s not you but your brother who is disabled. Now, how are you going to look after him? Wouldn’t it be much easier if he passes you $10,000 every year to defray some of the expenses?

3. A worthwhile “investment”

How would you define a good investment? Too often, only one criterion is mentioned – rate of return, usually measured in terms of interest. Apparently, the most meaningful definition of a good investment should be – It pays best when needed most.

When something untoward happens, life insurance provides a guaranteed “investment” return. Although we will never wish to benefit from this investment, it pays us at the moment when needed most.

4. An expression of love and care for family

“It’s a mistaken kindness or misappropriated affection, to provide so well today that inadequate provision is made for tomorrow.”

family

This is life insurance at its best. The average person may feel that buying various gorgeous/cool gifts is a good expression of love and concern for the family. So, he buys a car so the family has a convenient form of transportation, on instalment. He buys a huge 3D smart TV for the entertainment of his wife and children, on instalment. All is well and good, provided he lives long enough to see the end of the payments. But should the unexpected happen, every item on hire purchase will be taken away, leaving broken dreams and unfulfilled wishes.

Children are told to study hard, not just for today, but to be ready for tomorrow. By buying life insurance, the parents have demonstrated a live example for the children – by taking care of tomorrow today, the future will take care of itself.

5. Peace of mind

“Death comes everyday to someone and someday to everyone.”

It is the only certainty in life, other than tax maybe. When a responsible person knows that he has made sufficient preparation for a predictable event in the future, he feels a sense of peace with himself and peace within himself.

Still, there are people who prefer to worry and take a risk. To be under-insured is the biggest gamble you can take. And it is a particularly tragic one, for if you lose, it is not you but your loved ones who lose. Why worry when you can insure? In fact, why worry when for a small regular sum you can let the insurance company do the worrying for you?

6. A security against creditors

“Sir, this bag of money can only be given to your wife and children. Nobody else can touch this.”

loansharkA person will never know when a creditor may turn up. And when the creditor comes, usually this will be at the worst possible time when the family can ill-afford it. How sad to see houses and all types of assets being taken away because creditors have a legal right to them.

No widow should suffer the additional hurt of having her assets re-possessed because provision was not made for some money to be creditor-proof! The proceeds of a life insurance policy can only be received by his beneficiaries and is protected from any creditor.

7. Tax Relief

This used to be a popular reason for buying life insurance. Your premium paid on your policies is considered as a tax deduction – it will not be part of your income that is taxed! It is a reward for looking after your own future needs.

People in the lower income bracket will also find this reason to be a good incentive to cover themselves.

Is Paying for Insurance a Gamble? Your Biases Could Hurt Your Finances

 Some people may feel that paying for insurance and gambling are similar because in both cases, a person sets aside a smaller amount of money in the hope of getting a disproportionately larger return. Let’s look at the 3 behavioural biases in gambling psychology which could affect your insurance planning – framing effect, loss aversion and optimism bias.

1. Framing effect

The most significant bias experienced by us is that of the framing effect of insurance pay-outs. In gambling, the benefit is the immediate gain of the money wagered. One can immediately experience the joy of winning.

Insurance, on the contrary, has benefits which are not easily foreseen. Is it an asset or a liability? Why should I be paying money to cover an event that I do not wish would happen? Decision making behind insurance purchases is in direct conflict with many of our common product purchases. Would I buy a computer and not use it? This bias is stronger towards insurance due to its benefits being intangible. When a product is too complex, we tend to procrastinate decision-making and thus, insurance is often neglected among our priorities.

2. Loss Aversion

Humans are highly loss averse.  We have a stronger tendency to avoid losses than to acquire gains. Empirical estimates that from a gambling perspective, the pain of losing $100 is at least twice the joy of gaining $100. So, if people are more loss averse, does that mean people are more likely to buy life insurance? The purpose of insurance is to protect us and our family against huge financial losses from catastrophic events right?

Unfortunately, the thought process of a consumer on the street is even simpler than that and the following video is indeed a cause for concern.

A probable reason for this finding would be that people view paying insurance premiums as a guaranteed loss, while the insured event is just a possible loss. When one is faced with a small guaranteed loss versus a larger possible loss, as behavioural studies suggest, many will choose to take a gamble and NOT buy any/sufficient insurance. Many people risk having their savings wiped out and find themselves severely lacking in insurance coverage ONLY when disaster strikes.

3. Optimism Bias

This is a well-established bias that causes someone to believe that they are less at risk of experiencing a negative event compared to others. Will a gambler walk into a casino thinking he is going to lose money? The answer is almost definitely no as we are often filled with high hopes of making a profit.

On hindsight however, many gamblers will feel that they should not have started gambling in the first place. Unfortunately, this realization usually comes only after one has suffered a significant loss. Optimism bias always leads one to overestimate the chances of winning and underestimate the risks of losing.

The same logic applies for insurance. Most people feel they will certainly live a healthy and accident-free life. (Honestly, who doesn’t?) Sadly, life is as predictable as the September 11 attacks and we can’t use a crystal ball to find out what happens tomorrow.

Insurance planning is an integral part of one’s financial plan. In the event of a thunderstorm, only those who carry an umbrella can be sheltered. People who don’t have an umbrella end up drenched. A well-planned insurance portfolio is the exact opposite of a gamble. Without sufficient coverage, we are gambling with the financial future of ourselves and our loved ones. Given the little insurance planning most Singaporeans have, many people may be “gambling” without realizing it.

How is “Safe” Actually Dangerous? And Vice Versa…

Some people may feel that investing in equity markets is dangerous. This is true when you do it for the short term and focus on a single country market. However, if you have a globally diversified portfolio and are able to invest for the long term, you will be able to enhance your returns with a low level of risk.

Here’s a simple question – Do you think the world’s economy will be larger 20 years from now than it is today? More likely than not, the answer is yes. The world’s population will be larger in 20 years, which will lead to more people using/wanting goods and services provided by companies. With an increase in overall demand, companies will be producing more and generating more profits. With greater profits, stock prices and stock markets will rise. The MSCI World stock market index shown below reflects how our economy grows with time.

Credit: Wikipedia
Credit: Wikipedia

Population growth is not the only driver. Human beings are also always demanding a better standard of living. For example in Singapore, we “upgrade” from a HDB flat to a condominium; we drive a small car and “upgrade” to a larger one. As markets like China, Thailand and even Vietnam open up and grow economically, their people will have higher incomes. They will start with demanding basic consumer goods and as their incomes grow, they will want to buy more and better products.

You may ask – If I put all my money in Thailand today, can I expect a definite profit in 20 years’ time? That is harder to predict although there are many good reasons to believe that Thailand will continue to grow. Many countries have faced extended periods of decline before (e.g. Japan in the 1990s). This is why you need to have a well-diversified portfolio across different regions and countries around the globe.

Our annual inflation rates in Singapore for the past 3 years have been fluctuating from 1.5% to 5.4%. This is precisely why it is risky to leave your money in “safer” instruments such as fixed deposits (often yields below 2% annually), because it might be worth less than the amount you would have to pay for your daily needs over time.

Everyone should know the difference between gambling and investing. A trip to casino can be fun but approach stock market in the same way and you will find yourself in trouble. Like a turbulent flight, volatility is uncomfortable and it is easy for anyone to bail out at the first wobble. However, if you are currently in your 20s or 30s, youth is the single huge advantage for you to ride out the ups and downs in the long term. Successful investing requires one to embrace volatility, not fear it.

But if you keep your money in fixed deposits or other “safe” instruments, you do not know if the returns will keep pace with inflation over the long term and that will be a real danger.

3 Mistakes in Retirement Planning

retirementIt is common for young working adults to delay saving for retirement as they feel that they still have a long time before this stage in life.

Suppose you are 25 years old now and intend to retire at age 65. Given the average life expectancy of Singaporeans of 85 years old, you would have about 40 years to accumulate wealth and live the remaining 20 years without a working income.

Among the younger Singaporean parents now, most are only having 1 or 2 children. Due to the fact that the standard of living will increase in future, it is getting harder for our children to survive and take care of us when we turn old. It is not sensible to depend on our government too. Hence, the best way is to prepare now on our own, so that we can enjoy our old age without worries. Here are 3 mistakes you should avoid when planning for your retirement:

1. Saving too little

saving too little

Many people save around $100-200 per month. This is not sufficient if we want to retire at 65, and live a decent lifestyle (eg. travel once a year and eat out once a week). If you save $200/month at 6% growth per year, you would only have $400,000 in 40 years’ time. Naturally, if you intend to retire earlier at say 55, you have less number of years to save and need to thus save more.

2. Starting too late

When we are in our 20s, we save for marriage and our first house. In our 30s, we save for our children’s education. It is only when our children are much older, we begin to start saving for retirement. By this time, we are likely to be in 50s. Even if we begin at 40s, to meet our financial goal, we may need to turn to investments with higher yield. By not managing these higher risk investments properly, we may even lose our savings.

3. Playing it too safe or too risky

If we keep our money in the bank, the low interests paid are grossly insufficient to help us beat inflation. Hence, the purchasing power of your money is actually shrinking. On the other hand, if you do not know how to invest and just plunge into the stock market, you are likely to lose a lot of money. Depending on their risk appetite, there are different forms of investments which are suitable for each individual. The 3 most common forms in Singapore are shown in the following table:

Holding period Investment (low to high risk) Expected returns Risk of Loss
1 year Fixed deposit 1% Very low
5-10 years Bonds 3-5% Very low
17-25 years Stocks 7-15% Very low

For these 3 types of investments, the risk of loss can be minimised with their respective holding period. The riskier the investment, the longer the holding period required, and naturally you can expect higher returns. For younger people, there is an advantage with stocks because they have a longer time horizon to invest before retirement. Hence, it is also important for you to know which stage of life you are at, understand your purpose of saving & investing and select a product which fits your risk appetite.

At age 25, retirement may seem to be something so much later in future. But the later you start saving for it, the greater the amount you need to save. As an article from Lifehack suggests, one of the top 10 regrets (Point 8 in article) in life among people who are about to die is not saving more for retirement. Remember the saying, “You are the young person that can take care of yourself at old age”.