To help you determine how much insurance you need in Singapore, follow these general guidelines.
Insurance is an important need for many Singaporeans, especially since we don’t seem to like to save money. Yet, deciding how much to spend on insurance can be a pretty complicated affair, especially once you start considering the myriad risks you need to plan for.
To help you determine how much insurance you should buy, follow these general principles.
Buy According to Your Budget
To be frank, how much insurance you should buy is a matter of practicality. Work out the amount you can comfortably spend on insurance premium payments each month, quarter or year. You should buy insurance only up to that amount, and not more.
There is no point in buying insurance if doing so means you’ll hate your life every time your premium becomes due. After all, the point of getting insurance is to gain some peace of mind, not to jack up your stress levels.
This, however, doesn’t mean you should go without insurance, especially if you do not have the means to cope with a serious illness, accident, or any other situation that would require substantial financial resources.
Instead, you should start off with a policy you can afford, then upgrade or add on to your policies as you come into a larger pool of funds.
And you don’t even have to do this all on your own. A competent financial advisor will note down your current levels of protection and schedule future meetings for review and recommend timely and appropriate upgrades.
Buy Only What You Need
Not getting enough insurance is clearly a problem, but going the opposite direction and buying more than you need is also not beneficial.
This is a little-known fact but the maximum lifetime insurance claims an individual may be awarded is capped at S$2 million in total.
This applies whether you have one policy or many. Therefore, paying for more policies than you need is simply a waste of money - money which could potentially be better served elsewhere in your portfolio.
Buying too much insurance causes your expenses to go up, which may bring about financial hardship. You may find yourself struggling to keep up with your premiums payments. And if you should encounter a retrenchment or other major disruption to your cashflow, you could find yourself facing the unpalatable prospect of losing money on your insurance policies.
This is because most insurance policies will be terminated if you fail to keep up with premium payments. Should this happen, you’ll often lose a large portion (in some cases, even all) of the premiums you have paid thus far - at significant financial cost to you.
Buy Insurance for Protection, Not Investment
When you next find yourself considering an insurance plan, make sure you aren’t making a common mistake - thinking that insurance and investment are one and the same.
Insurance and investments are meant to fulfil very different functions, and should be considered as such. Strictly speaking, the function of insurance is to offer protection against the risk of death, serious injury or critical illnesses - i.e., situations that prevent you from fulfilling your economic potential.
When necessary, insurance steps in to replace the potential earning that you have lost, which allows you and your family to maintain a standard of living that is more or less similar to before.
On the other hand, investment plans are meant to grow your money, so as to secure your financial future. If your investments do well, you will become richer, and you may find yourself having the money to deal with critical illness, serious injury and death.
You may notice that both insurance and investment have the same end goal - preventing financial hardship.
But, when you are investing, you are spending money to make more money. Hopefully, your investments will do well enough so you can be financially secure, and have the means to deal with life’s risks on your own.
However, in insurance, you are paying money to gain protection against life’s risks from a third party. This is the primary relationship between you and your insurer, even though there are insurance products such as Investment-linked Policies (ILPs) that promise to help you grow your money.
Regardless, don’t mix up the two. Focus on getting the protection you need when buying insurance. This will help you avoid a situation where neither your insurance coverage nor your investments are sufficient.
Spend on Insurance as the Need Arises
If you’ve ever wanted to feel paranoid about life, just ask a financial adviser for a list of the terrible things that can happen to you. After you’ve gotten over the ways a pigeon can mess you up, you’ll realise it’s nigh impossible to get covered for everything on the list.
The fact is, the need for insurance increases in time; you can see this demonstrated in how insurance premiums get more expensive as you age. They are not being ageist, they are simply being pragmatic about the risks of someone suffering a debilitating stroke at age 75 vs at age 25.
Therefore, a good rule of thumb is to spend on insurance as the need arises.
You should always start with getting sufficient protection for yourself - sufficient here means appropriate to the risks commonly faced by your age group. Once that is accomplished, then look into how you can help provide for your children or other dependants.
Recognise that you may not be able to fully provide for all their needs, as you will need to take care of your own retirement needs first and foremost.
Lastly, it doesn’t hurt to spend some time with an independent financial adviser to sketch out what your coverage plan should look like.
Remember, you are never obliged to buy anything, but you shouldn’t take their time for granted either. Make clear what your objective is beforehand - be it to put together a plan, find out more about available plans, or to buy a policy (if you’re ready).
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By Alevin Chan
A Certified Financial Planner with a curiosity about what makes people tick, Alevin's mission is to help readers understand the psychology of money. He's also on an ongoing quest to optimise happiness and enjoyment in his life.