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Choosing insurance policies for the first time can feel like shopping for groceries without your Mom around. (Why the heck are there so many types of spinach and why does IP rider sound like IP Man and Kamen Rider had a baby?)
Despite how big a milestone buying your first insurance policy is in adulting, most of us find insurance boring.
You pay thousands of dollars every year and the best case scenario is that you never have to claim the payouts. How is that fun?
This week, to make reading about insurance a bit more palatable, instead of going down the list of all the different types of insurance policies that people may own – I can count at least 15 – we’ll take a look at the policies that I’ve bought in the four years that I’ve been working.
Disclaimer: I’m no insurance expert nor do I profess to have the best portfolio of policies that balance risks and costs. This is not meant as a template.
Instead, I hope that as I give my reasoning for owning the policies that I do, those who are new to insurance can have a better idea of the products that are available and better decide on the coverage they need.
Hospitalisation insurance: To cover my expenses if I have a medical emergency.
I consider this to be the most important policy I have. All Singaporeans and permanent residents are covered by MediShield Life, a basic health insurance scheme that helps pay for large hospital bills and selected treatments at public hospitals.
On top of this, I also have what’s known as an Integrated Shield Plan, which my parents bought for me when I was younger.
It’s like an add-on to MediShield Life that you purchase from private insurance companies that covers the bills for more expensive wards in public hospitals or wards in private hospitals. It also has higher limits on what you’re allowed to claim.
Term life insurance: When people think of insurance, this is often the first thing that comes to their mind – a policy that pays out a sum of money when you die.
I think of life insurance as a way of ensuring my dependants won’t suffer significant financial hardship if I die prematurely. I don’t have any dependants, but I recently bought a term life insurance policy that pays out S$1 million.
This would help support my parents as well as cover my housing loans if I upgrade to a private home in the future. I admit that S$1 million is probably a bit of an overkill, but I chose to buy it sooner rather than later because the plan comes packaged with a critical illness plan that I needed, and the premiums for these plans start to spike when you turn 30, which I’m sadly nearing.
Disability income insurance: To replace part of my monthly income if I’m not able to work.
This was the first insurance plan I bought on my own because I don’t want to burden my loved ones to provide for me if I’m unable to work, which will be a heavier financial strain than if I were to die prematurely.
Should I be unable to perform my occupation due to illness or disability, my policy will pay me S$2,750 per month until age 65.
Critical illness: To cover additional expenses if I contract a serious illness.
The life insurance plan that I recently bought came with an add-on (known as a rider) which pays a lump sum of S$150,000 if I contract a critical illness as well as S$150,000 for an early-stage critical illness.
My intention for this plan is to help cover any additional medical payments that can’t be claimed under my hospitalisation insurance.
Since critical illness plans are paid out as a lump sum, it’ll give me the flexibility to use the funds how I want to use it, even taking a break from work to focus on recovery.
General insurance: For ad-hoc needs.
Whenever I travel, I almost always buy travel insurance to give myself peace of mind since my health insurance doesn’t cover medical expenses for accidents or illnesses while I’m in a foreign country. As an added benefit, it also protects me from any costs incurred due to travel disruptions or delays.
I also get medical coverage under my company’s insurance policy for regular visits to the doctor and specialist treatments.
With so many types of policies out there, it can be daunting for fresh graduates figuring out which ones to buy.
Insurance isn’t cheap. Every year, I pay about S$3,070 in insurance bills. Assuming I took this money every year to invest until I turn 65 and was able to earn a 5 per cent annual return, my savings from not buying insurance would amount to more than S$320,000.
What helps me choose the policies I need is to only buy plans where the risk is too much for me to bear. Insurance isn’t a lottery ticket where you’re betting against your own life or health, but a hedge that covers your losses.
You don’t buy a S$1 million critical illness plan for a shot at being a millionaire if you happen to fall sick. Deciding on the amount of coverage you need then becomes a question of how much in losses you’ll need to cover if that unexpected event were to happen.
This thinking was also in part what guided me to go with term life insurance over a whole-life plan. (For term plans, you pay for protection for a fixed period of time. Whole-life plans typically have savings or investing elements tied to it, and policyholders may be able to get back cash when they surrender their plans.)
Personally, I don’t like to mix insurance with investments because they serve different purposes. Term is also cheaper, and I see more value in paying as little as I can for the protection I need while investing the rest on my own without incurring additional middle-man costs.
There are many rules of thumb and opinions about insurance, such as how much of your monthly salary you should spend on insurance plans, or what insurance you need to buy first. But it really depends on your own needs and circumstances.
As I mentioned before, my personal policies shouldn’t serve as a template for your own insurance plans, but a way to broadly explain the common policies people buy and why they buy them.
A parent whose children depend on him or her to provide for the family may see the need to get more life insurance than I have. Meanwhile, someone with a lot of savings stashed away may not see the need for insurance to replace their income when they’re unable to work.
Before committing to an insurance plan, make sure you know what you’re buying and speak to a financial advisor you trust who will recommend policies that you actually need.
TL;DR
Picking the right insurance plans can be daunting for fresh graduates
Insurance policies provide a financial safety net for risks that are too expensive to bear
Commonly-bought policies include hospitalisation, critical illness and life insurance
What insurance you need depends on your own life circumstances