You can insure anything in Singapore, from your mobile phone to your pet poodle. But should you really be buying insurance for everything?
These days, you can buy insurance for anything in Singapore. Pets, laptops, mobile phones, toy collections, the list is endless. However, this raises the danger of being over-insured.
Remember that, ultimately, some forms of insurance are just costs with few benefits. Here’s how to decide whether you need something insured, and how much to spend on insurance.
How Can You Be Over-Insured?
You’re considered to be over-insured when the maximum possible benefit outweighs the total cost of premiums paid. For example:
Say an insurer overs to cover the cost of your television from theft or breakage, for just S$4 a day. The television set is worth S$5,000. This may seem like a good deal to you, but consider this: how often does your television break or get stolen?
Statistically, most people never break their television, to the point where they change it five to seven years later. And theft of television sets is almost unheard of in Singapore (the thief wouldn’t get very far).
But let’s assume that, given five years of use, you break the television once. Over five years, you would have paid S$7,300 in premiums. With that amount, you could buy a new television of the same value, and still have S$2,300 left over.
It’s not worth paying the premiums to cover the cost of the television. Another concept to understand is the risk difference, between general insurance and life or health insurance.
General Insurance Versus Life or Health Insurance
You will notice that life or health insurance is much more expensive than general insurance (i.e. insurance for things like your car, your house, or your mobile phone).
In spite of that, it’s important to always have good life or health insurance coverage. But you can get away with skipping some forms of general insurance. Why? The reason is risk and severity.
General insurance might be wasted, because there is a chance you won’t need to make a claim at all. It’s quite possible to use your phone for three years, and then switch to a new model without ever breaking it. This is not true for health or life insurance.
The unpleasant fact is, when it comes to the human body, everybody gets sick or dies eventually. A life or health insurance claim is not a matter of “if”, it’s a matter of “when”. It’s unlikely that your insurance will be wasted, so it’s worth forking out a bit more.
The other reason is of course severity. You can probably live without a television or phone, no matter how the thought might unnerve you. You can’t live without essential medical treatment however, so the severity of having no life or health insurance is much higher.
Using this principle, it’s easy to derive a simple matrix:
High Risk, Low Severity
Correct Solution: Savings, but Probably Not Insurance
These are accidents which can happen quite often but are not at all life-changing. An example would be damage to a private pool that you use for parties every week or damage to a mobile phone that you carry everywhere.
The rule of thumb, for these types of losses, is to use savings but not insurance. For example, you could set aside 20% of your pay into an emergency fund, to cope with issues like the loss of your mobile phone or damage to your pool.
If you want to buy insurance, take a frank look at how often the damages happen, and whether the premiums are worth the cost. Most of the time, you should not bother to insure a cost that you can cover with ease. For instance, there’s no need to insure a S$100 wristwatch, even if you use it every day.
Low Risk, Low Severity
Correct Solution: Don’t Insure
These are infrequent accidents, that wouldn’t affect you much even if they do happen. For example, say you have an old piano, that you actually never play anymore. The risk of damage happening to it is low (you never use it), and even if it were to finally break, your lifestyle would hardly be impacted.
Do not insure items like these, as you’re just wasting money.
Low Risk, High Severity
Correct Solution: Comprehensive Insurance
These are situations such as car accidents, your house burning down, or losing your job due to a disability. Even though the risk is low, you need to be insured as the fallout can destroy you financially.
Home content insurance and car insurance are the leading examples of this, as is personal accident insurance.
High Risk, High Severity
Correct Solution: Avoid, and Use Comprehensive Insurance If You Cannot
Most Singaporeans will not encounter this sort of situation. Examples are insuring your house when it’s built in a known earthquake or typhoon area, or war correspondents insuring their equipment and health while visiting active combat zones.
However, other examples can include extreme sports (e.g. BASE jumping, free scaling buildings), or danger tourism (deliberately visiting places with natural disasters, civil war, and so on).
These situations should always be avoided first. You should seek insurance if you are absolutely focused on being in such situations, but premiums will be high (even if you can find a willing insurer).
Don’t “Double Up” on Insurance Unless You Know They Stack
Not all insurance policies stack. For example, you can’t buy five different types of travel insurance for your trip, and then claim from all five if an accident happens (insurers have ways to check with each other).
You will only be allowed to claim from one particular policy, so the rest is just wasted money.