4 Life Insurance Myths Debunked

Life-Insurance

Do you have a contingency plan that can protect your family just in case something bad happens to you? Assuming you are the main income earner in your family, it will be difficult for your loved ones to pay for school, food and other amenities in the event you pass away. Let’s be honest, it’s a rather scary thought. If you don’t have life insurance ready, you could be leaving your family in serious financial distress. Having life insurance can help support your loved ones.

However, if you’re not familiar with life insurance policies, it can be difficult to distinguish what is true about life insurance and what is a myth. To help clear up confusion, here are some common myths about life insurance.

Life insurance is too expensive

To the uninformed, life insurance can seem costly, but this is one myth that can be debunked. The cost of a life insurance policy varies, as it depends on several factors such as your entry age and medical history. Life insurance costs less than what most people think. Depending on your situation, you can tailor your insurance and lessen your costs drastically. Keep in mind that insurance is cheaper when you’re young, as you get older, premium prices become higher.

If your employer provides coverage, it’s enough

While many companies do provide employees with life and health insurance, this benefit only lasts as long as you are still employed under that company. While you’ll be covered, this coverage is only temporary and the benefit that is put into your insurance policy isn’t much. Furthermore, the policyholder in this case is your employer which means they reserve the right to amend the terms of coverage with their chosen insurer. This leaves you with uncertain coverage.

It’s advisable to separately apply for your personal life insurance plan to ensure that your family will be able to receive additional funding long after you are no longer able to provide for them. Additionally, you’ll have peace of mind knowing that your loved ones have a reliable means of obtaining funds in the future.

Life insurance is only for those who have children

If you’re not married and don’t have any children, it’s still important to seriously consider getting life insurance. Keep in mind that you still have dependents—your parents or siblings, for example, could from life insurance, as it can still cover other costs such as funeral expenses, unpaid bills and debts. If you were to unexpectedly pass away without a life insurance plan, your loved ones will be left to pay for these costs. So, even if you’re single, do consider obtaining life insurance as early as possible.

My health condition can exclude me from getting life insurance

Even if you have health conditions you can still have life insurance, although you may need to purchase a policy with lower coverage limits. Essentially, life insurance isn’t restricted to people of a certain age, health or even salary. You can always adjust your policy based on all these factors. There are plenty of insurance options that can suit your needs and budget.

These are just some of the many myths about life insurance which can make it difficult for people to fully understand and appreciate it. This often leads to confusion for some people on whether they need insurance or not. While the idea of having life insurance seems intimidating, doing so will bring plenty of benefits for your loved ones.

4 Financial Essentials for New Parents

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Being part of the Gen Y babies born in the 1980s, in recent years I have found myself often discussing the topic of parenting with my friends who have just become Mums and Dads. Interestingly, quite a handful of them have asked me the same questions: How can I financially plan for my baby? What are policies should I be looking at as a parent now? This article shall touch on these concerns for new parents.

1. Get Health Insurance

According to statistics from the Ministry of Health, the average probability across both genders of a child aged 0-4 being warded is higher than that of the population aged 5-69. It is therefore, never too early to have our newborn well-covered for hospital bills. At the same time, it is equally important for parents, who are the ones bringing the dough home, to have adequate health insurance for themselves.

2. Get Life Insurance

Each parent should also take out a life insurance plan to offer financial stability. Many parents get a life insurance plan on a child as soon as they bring him or her home, but it’s more likely that something will happen to one of the parents. Life insurance will cover the cost of child care if the surviving parent has to work, as well as other expenses related to bringing up the child. The purpose of life insurance is to make sure the surviving spouse can continue to take care of the kids.

3. Create an Education Savings Plan, Don’t Overlook Retirement

A child might not have taken his first steps, but soon he’ll be walking across the graduation stage, so time is of the essence when it comes to saving for tertiary education. However, it is important to balance the need to pay for your child’s education and save for your retirement.

Most new parents are very excited and focused on making sure their kids have great early years that they overlook planning for their own retirement – which is equally, if not more important. There are many financing options to send a kid to university, like taking out loans and scholarships, but there are no loans for retirement.

Because of this, parents need to consider their retirement savings first before putting money aside for their child’s education. It is important to discuss with your spouse how much you want to contribute to your child’s education and weigh that with what they can save for retirement.

4. Plan for the Unexpected

Once the baby is home with the sleeping and eating routine established, parents need to determine and detail an estate plan in case something happens to one or both of them. Parents need to create a will stating who would care for the child in case the unimaginable happens.

4 Life Stages of Financial Planning

Many of us know that financial planning is a lifelong process. Our ultimate dream is to achieve a retirement life which we desire. This could mean being debt-free, having a passive stream of income and best of all, pursuing our interest and passion which we might not get to do in our younger days.

Our lifelong financial process can be split into 4 stages. What are the crucial aspects which we should consider at each stage? Read on to find out more.

Stage 1: Young Adult (Aged 20-30)

The young adult is new to the working world and naturally earns a low income. He/she is driven to succeed and increase his earning ability. Being single, there are little or no financial commitments for him/her. Some may have an education loan to pay off after graduation which can be fully redeemed after working for 2 to 3 years.

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This is the best time for you to start some form of wealth accumulation to prepare for retirement as it could be harder to save money in later stages of life when financial commitments increase. With the high risk tolerance at a young age, investing in more equities and mutual funds on a regular basis is recommended.

 

Buying a house is common goal for young couples preparing to get married. Do the math on your liquid finances and CPF savings to find out which type of property best suits your financial ability.

Having a comprehensive insurance portfolio is a must as well for wealth protection. Key insurance components include Hospital & Surgical, Critical Illness and Disability.

Stage 2: Young Family (Aged 30-40)

At this stage, one could be married with or without children. With a moderate income, you would have more financial commitments such as a home loan and a car loan. Retirement planning remains an essential component in your portfolio. Risk tolerance starts to moderate as you are one step closer to retirement. A correct investment mix of equity and fixed income helps you to achieve financial goals easily.

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Being a parent, getting insurance cover for your child prevents you from incurring unnecessary huge medical bills. Saving for your child’s future tertiary education should be your concern too. Another wealth protection area concerns the largest debt that you share with your spouse – home loan. If a spouse passes away, any outstanding loan is left to be paid off by the surviving spouse. Be responsible in financially protecting your loved ones in the event of your passing.

 

Stage 3: Mature Family (Aged 40-50)

Your children are grown up by this stage of your life. Your earning ability is at its highest and naturally your expenses increase as well. You could possibly take up a bigger car loan of home loan, thus increasing your financial commitment.

Child’s education and retirement planning are your main financial objectives for the long term. Therefore, your investments should be diversified in equities and debts instruments according to your age, available time and risk ability.

Stage 4: Pre-retirees or Retirees (Aged 50 and above)

retireesBy now, your home loan would have been fully paid off and your children are no longer dependent on you financially. This means low financial commitment which means your protection needs are its lowest stage. However, health insurance continues to play an important role as you age.

The security of your retirement savings carefully accumulated over your younger days, coupled with regular income, becomes your focus now. For that, investments should be more in fixed income which yields regular income with low risk.

Manage Your Wealth Like a Football Team

Just like managing a football team, managing your wealth properly requires a good team of players in 3 departments – defence, midfield and forwards.

In a game of football, let’s imagine if we have a team with a great goalkeeper and defenders but without strong forwards, will we be able to win? Well, the best possible result may perhaps be just a draw. In reality, when it comes to managing wealth, many people have made the mistake of being too conservative.

footballA dangerous thought which they have is keeping all of their savings in their bank accounts, assuming it is the most reliable way to make their money grow. However, they have forgotten the fact that bank interest rates can never keep up with the pace of inflation. Over a long period, the savings of these people will diminish in terms of purchasing power.

On another hand, can a football team do without a dependable goalkeeper and defence? The answer is certainly no. When facing the fierce attacks of an opponent, a team with a weak defence will be in shambles and suffer terribly. Similarly, without proper insurance cover to protect our wealth, if any disaster strikes, a rich man can very quickly become a poor man. Therefore, just like managing a football team, managing your wealth properly requires a good team of players in 3 departments – defence, midfield and forwards. With this analogy, let’s look at these 3 departments in wealth management.

1. Defence: Emergency Fund & Insurance

As the saying “Saving for a rainy day” goes, we should aim to keep an emergency fund of 3 to 6 times of our monthly expenses. This sum of cash will come in handy when events like a salary cut or retrenchment happens. For this emergency fund, we can save our money in bank savings accounts, fixed deposits or money market funds.

At the same time, we should also purchase insurance. For instance, hospitalisation insurance covers your medical bills in case of an accident or critical illness. Surgical fees can amount to over tens of thousands of dollars, and treatment for long-term illnesses such as kidney dialysis can cost more than $20,000 annually. With adequate protection, it gives you a peace of mind that unforeseen circumstances are prepared for. To understand your insurance needs, you can refer to an earlier post here.

2. Midfield: Endowment and Moderate Risk Investments for the Mid-Term

A strong midfielder has to be able to support the forwards and help out in defence. You can think of putting your money in investment instruments with moderate risks, such as savings endowment policies and balanced funds which invests in a mix of fixed-income (bonds) and equity, some with a larger portion in bonds. Alternatively, you can set aside a pre-determined amount to invest every month in global funds. This strategy of dollar cost averaging can help your money grow in the mid-term.

3. Forwards: High Yield Investments

With a solid defence and reliable midfield, if you have a surplus of cash and wish to grow it, you can put your money in investments with high returns and high risks. Such investments include real estate, stocks, currencies or sector funds. For those of you who actively keeps an eye on the stock market, you should have a super-sub forward – an opportunity fund. Every crisis comes with an opportunity. Whenever there is a global stock market recession, we are presented with an opportunity to buy stocks at very low prices, like it were the Great Singapore Sale. If you had bought DBS shares in early 2009 when the price was $7 per share, you can sell them off at $16 per share now and earn a huge profit.

Here’s to your financial success by managing your money just like a football team, or for the matter, any other team sports which requires a defence, midfield and forwards.

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.