Commentary: When it comes to insurance, less is more for young adults starting out
You don’t have to be insured from head to toe, especially when you are just starting out, says Dawn Cher.
SINGAPORE: Over the last two weeks, I came across several online posts about Singaporeans with multi-million dollar life insurance policies.
This got me thinking: How much is too much? How do we decide on what type of insurance policy to buy and when?
In my parents’ time, insurance was a simple affair: In most cases, because disposable incomes were lower, many went without them.
If they did get insurance, they had one adviser they trusted to recommend a handful of plans that covered basic needs.
Today, the environment looks vastly different. There is insurance for health, business, travel, homes, even retrenchment. There are new plans covering cyber risks, your pets and even events like your weddings, too.
According to the Life Insurance Association, the number of life policies has more than tripled over the last 20 years, and we pay almost four times more in annual premiums for life insurance compared to 10 years ago.
Financial blogs and social media have also driven interest in personal finance and insurance.
With young people getting their information from social media, insurance agents have also taken to Instagram and Facebook to market their products.
Many produce and share bite-sized infographics to artfully illustrated case studies. While these tidbits can be useful, they also can be potentially misleading when read without context.
An OCBC survey last year found Singapore millennials are keen to invest and buy insurance policies, but less than half feel knowledgeable enough to do so. The sheer variety of information sources out there can be challenging for someone starting out.
MITIGATING HEALTH RISKS
Insurance is important. One useful approach is to think about it as outsourcing your biggest financial risks to a third party.
Instead of taking on the risk of a potential financial setback, you pay the insurer to bear that risk instead so you can have peace of mind.
In the event that something happens to you, the insurer pays a sum of money to you or your loved ones. If nothing happens, then the insurer gets to keep the premiums you paid.
Unless it’s an investment-linked product or a life-term policy, where you get a payout after the tenure is over. Given the high medical costs in Singapore, unexpected medical bills should be the first risk you may want to outsource.
My sister – a fitness instructor – was recently hospitalised for a sudden bout of appendicitis, and the hospital bill for such a treatment can easily set you back by at least S$20,000.
READ: MediShield Life premiums may rise by up to 35% for some, higher claim limits proposed as part of review
We do have national insurance plans like MediShield Life which provides protection against large hospitalisation bills in Class B2 and C wards in public hospitals.
Singaporeans can also use MediSave to pay for such bills, there are also withdrawal limits of S$450 a day for hospitalisation costs, and a variable surgical limit based on the complexity of your procedures.
In an emergency, you may want to skip the queues at a public hospital and head to a private one. Here is where you will need an Integrated Shield Plan so you can pay the difference.
Large bills can be stressful and savings may not be enough. Even if you are young and healthy, a good medical insurance plan should be high on your list.
ADDING ON RIDERS
The statistics are depressing but one in four in Singapore are expected to develop cancer. This is where a Critical Illness (CI) plan can come in – to cushion the financial impact of a long drawn expensive illness.
A CI plan can be bought either as a rider (think of a rider as an additional benefit) to a base-life plan or you can purchase this as a standalone plan, increasingly offered by more insurers in recent years.
If you get a CI rider on top of your life plans for protection, ensure that you find out exactly when payments kick in – some payouts only happen when the disease is diagnosed at a later stage – that is, you don’t get a payout if you are diagnosed at Stage 1.
Early Critical Illness (ECI) plans start payouts after you’ve been diagnosed at the very early stages but typically cost more.
FORCED SAVINGS WITH PROTECTION
There are products that double up as protection as well as savings. Some parents buy an endowment policy for their children so that they can draw out the cash for their child’s university fees in the future.
With two in five millennials struggling to stick to their saving plans, endowment policies could help enforce this discipline.
Many insurance agents also recommend investment-linked plans for both protection and for building your nest egg. But these can come with administrative costs. I cancelled my investment-linked policy after realising how much I was really paying.
These were for sales and distribution charges (agent commission, fund management charge, administration charges, fund switching charges) and my investment units were also sold (on a monthly or yearly basis) to pay for insurance charges and policy fees.
BALANCE AND BEST PLANS
One question I often get is: “What is the best plan?" A better question to ask yourself should be, which is the best plan for me?
Insurance is highly personal – what someone else does or buys may not necessarily be the best solution for you.
Someone who has ageing parents and multiple children to look after may require a life plan with greater coverage, whereas another without dependents may not need it at all.
Think about your personal circumstances and work out your goals – do you want to take a break from employment to study or you want a comfortable nest egg by a certain age?
As a young working adult in the early years of your career, you may not be drawing a sizeable income just yet, so there’s no rush to buy everything.
Your needs will also evolve as you get married, have children, and when your parents retire. One strategy is to layer your insurance policies to ensure you get the protection during these prime years, and pare it down in your later years once you have fewer dependents.
Each insurer offers plans with different benefits, payment terms and premium levels. Think about which ones you prioritise and are willing to pay for.
Most agents will insist the plans they offer are the “best”. If you talk to someone from Prudential, they will recommend you Prudential policies – that’s the only ones they can sell you.
Ask the same question to an AIA agent and you will likely get a completely different answer.
Many financial advisers advocate spending no more than 10 to 20 per cent of your monthly income on insurance. But I would say, even that is not a hard and fast rule
If you are starting out with a lower income, you may want to stagger your insurance purchases. Focus on the policies you need the most right now.
When I was single, I only had life insurance. After I got married, I increased the amount of coverage on my life through additional term plans.
When my baby was born, I bought more life insurance and added critical illness and early critical illness plans. The more you pay for insurance, the less you have for retirement or just extra cash for holidays or other life events.
Ultimately, it is helpful to think of insurance as something that moves and changes with your own life.
Most importantly, avoid simply signing up with a policy without looking carefully at what you really need and how much you can afford to pay for.
Dawn Cher, otherwise known as SG Budget Babe, runs a blog on personal finance.