As young adults, I think insurance is the kind of topic that subtly seeps into our daily conversations. Being in university, we’re at this awkward age where insurance starts becoming too important to ignore, yet too foreign for us to get started. This article aims to equip you with the basic knowledge of how an insurance portfolio should be structured. We will go through common types of insurance, as well as what you should look out for.
However, it is important to note that there isn’t really a one-size-fits-all solution when it comes to insurance. Each of us has our own unique set of circumstances and financial needs. It’s also worth noting that I am not a financial advisor. I’m just a guy on the internet passionate about personal finance. For specific insurance advice, please consult a financial advisor instead.
What is insurance
Simply put, insurance is an arrangement by a company to provide you with compensation in the event of a specific loss in return for what we call a premium. Basically, you pay a company an agreed amount of money and they’ll compensate you if certain conditions are met. It’s a form of protection against a (likely) possibility.
While there are many types of insurance policies, each catering to different scenarios, we will cover the most common:
- Life insurance
- Health insurance
- Critical Illness
- Personal accident
To me, the first three are essential in most financial situations. The other two are important , but it also kinda depends on your situation.
Life insurance basically assures you a payout for death or total permanent disability (TPD). While the definitions of TPD may differ from policy to policy, the idea of life insurance is to leave behind a sum for your dependants in the case where you are permanently unable to provide for them. Dependants could be young children, the elderly or anyone else who depends on your income for a living.
You will probably also come across two different types of life insurance: term life and whole life. The main difference between term life and whole life is how much the premiums cost. Whole life insurance can cost thousands per year, whereas term life is way more affordable. But there’s a catch. Term life insurance typically covers you only for a specific term or up to a specific age.
Furthermore, term life policies also do not have any actual cash value in the event of an early surrender or end of its coverage. However, whole life coverage usually extends to end-of-life, or up until age 99 at least, and allows for the redemption of the policy’s cash value in the event of an early surrender or end of its coverage. Essentially, the main purpose of term life is solely protection, while whole life can offer protection as well as the opportunity to grow your savings.
But how much coverage is enough? This depends on your situation, but the very general recommendation is at least five years of your income. This way, you’ll have sufficient time to re-skill in the case of TPD or for your family to recover from the loss.
Every Singaporean has basic health insurance in the form of MediShield. While this may be sufficient to cover most of your health expenses, you should consider getting an Integrated Shield Plan (IP) to enhance your health insurance.
You might be wondering, why would I need health insurance when I already have MediShield? MediShield has an annual claim limit of $150,000. While it can cover most of your hospitalisation costs, that’s only if you stay in a public hospital and in a C to B2 class ward. An integrated shield plan allows you to make sufficient claims if you elect to have a B1 or A class ward. It also increases your claim limit (up to 1 million), as well as the ability to purchase a rider that allows you to extend your coverage to another person.
“But I don’t need a fancy ward in a hospital”. Well, that’s fair, but an IP costs around $200 – $300 a year for someone around my age still in university. To me, that’s a small price to pay for ease of mind. I’d rather focus on recovering in a comfortable ward without worrying about hitting my claim limits, than to save that few hundred dollars a year.
It is also worth noting that you can pay for your IP using MediSave if you haven’t hit the withdrawal limit.
Critical Illness insurance
Critical illness insurance typically pays out a fixed lump sum if you’re diagnosed with a critical illness—which is a severe or debilitating condition that requires a major surgery or results in severe disability over an extended period.
Critical illnesses include strokes, heart attacks, cancer and so on. Insurers and policies may have slightly different definitions of critical illnesses.
There are also two main types of critical illness plans, one of which pays out at a certain stage of the illness and one that pays out immediately after your diagnosis.
The type of policy that only pays out when you get to a certain stage of an illness is cheaper in terms of premiums paid, and can come in the form of early-stage critical illness and late-stage critical illness. Due to improvements in technology for early detection in healthcare, some people opt for early-stage critical illness plans to save on premiums.
Do note that the definition of early and late-stage critical illnesses varies from policy to policy.
Obviously, it would be best to get a comprehensive critical illness plan that pays out once you are diagnosed, but that really depends on your personal situation and whether you can afford it. That said, a critical illness plan costs about $1,000 – $2,000, and can vary depending on many factors. It is one of the more expensive policies you will come across.
While the concept is slightly similar to critical illness, it differs in the definition of disability and critical illnesses. Disability illnesses are more for physical disabilities that temporarily disables you from earning an income. Furthermore, instead of paying you a lump sum, the purpose of disability insurance is to replace a portion of your income. This lets you recover with more peace of mind, while still having a cash flow to cover your expenses.
It is worth noting that disability income isn’t immediate. It is subjected to a deferment period, which is the amount of time you have to be disabled before the policy will pay you an income. This can be two, three or even six months. The shorter the deferment period, the higher the premiums.
Premiums for disability insurance are around the mid-hundreds, but it really depends on how much coverage you are getting and how prone you are to disabilities. For this type of insurance, I consider it unessential but still something for people to consider. This is especially useful for people in physical professions like fitness instructors or blue collar jobs. That said, due to the deferment period, it’s important to note that disability insurance is meant to cover your most critical expenses
As such, it’s still important to have savings ready for a rainy day like this.
Personal accident insurance
While health insurance covers mainly in-patient needs, personal accident plans cover out-patient needs. This means that, instead of covering for the heavy hitters like cancer or death, personal accident plans cover more of the smaller accidents that don’t require hospitalisation.
Similarly, this is the type of plan that depends on your lifestyle and situation. Typically, a personal accident plan is more useful for an athlete as compared to an office worker, but it’s really hard to tell if you need one without information on your lifestyle or financial situation. A personal accident plan would be cheaper compared to what we just discussed, with premiums around $200 – $400 per year for an average person.
I hope this sharing has allowed you to better understand how to structure your personal insurance portfolio. I find that some financial advisors are profit-driven rather than customer-focused, so it’s often useful to have some knowledge of what you need or don’t need in insurance. Ultimately, each of our personal situations is different. This article is meant to equip you with basic knowledge about insurance, to aid you in your further research as a young adult.
Still confused? Let me know if there’s anything that you would like to know about insurance! While I am not a financial advisor, I’ll try my best to help :)