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INSURANCE BASICS

What Insurance Should I Buy?

Finally! The magic question is about to be answered.

Except that there is no magic answer - The insurance that you need varies from person to person, and is influenced by their individual financial situation and accompanying risk factors. (Like what their Mother-In-Law thinks they should buy, etc).

But no, we are not going to shirk from our duty and slink away without giving an answer, we just want to make it clear that there is no one size fits all solution.

Let's understand the scope of the answer here: Rather than specify which type of insurance plans you need, we have generalized an average Singaporean's insurance requirements into a financial pyramid. It shows the different types of cover that he should obtain in ascending order of importance.

Choose the right Insurance



!
Tah Dah: Our modestly termed:
Clearly Surely's Financial Pyramid of Needs


This pyramid shows the hierarchy of needs for an average Singaporean who is:

  • Of working age from 21-64
  • May have financial dependants
  • Does not expect to win the lottery anytime soon (hey, you never know)
  • Does not have a 7 figure trust fund waiting for him

Lets explain (or climb) the pyramid to understand it properly - these are our 3 guiding principles.


1
Endless wants, with limited resources: Priorities are the key.

Fully paid-for stay at luxurious room in a private hospital, well compensated for being disabled and a huge fortune to be bestowed upon your family are some benefits that insurance may provide for you IF you buy excessive amount of insurance.

Like all good things in life, you will have to pay for it.
Unfortunately for many of us, money IS an issue and hence we need to prioritize our needs and wants.

2
A strong foundation of (financial) security comes first.

The logic behind determining what insurance cover to obtain first: Obtain cover for the events that will hit you the hardest within the shortest amount of time.

Once that is taken care of, we proceed to build upon the foundation to cover for events that have the next hardest impact and so on.

Akin to building a pyramid - we are pretty sure the Egyptians (or aliens) laid a strong foundation before building their way to the top.


3
Centre of attraction: You, yourself, and certainly not Irene.

'If there are children, or elderly people seated next to you, first put on your own oxygen mask before helping them.'
This well-known pre-flight announcement holds true here - you must secure your own survival before you can help your loved ones.

Many times, we may put our children's needs before our own. ("Ah boy is starting primary school next year, we need to start saving for

his PhD") But that is erroneous because life may take an unexpected turn and you may well be out of pocket because of a serious illness, accident, or even death - how is Ah boy's education going to be funded then?

With that out of the way, let's take a closer look at the pyramid and explain why we designed it as such.

Pyramid Breakdown

What does it all mean?

Hospitalization Cover

Hospitalization

Why?

Because in Singapore, hospital bills have the potential to hit you the hardest. We are talking about serious hospitalization here, not having your wisdom teeth removed. In 2010, treatment for a heart attack cost, on average, $8000. That is without a shred of other costs relating to post op treatment, medication, and recurring check ups. - citation needed. A semi-prolonged stay at the ICU in a private hospital can set you back over 30k in 30 days.


How Much Cover to obtain?

Hospitalization cover is usually presented on an as-charged basis. Meaning to say, the insurer covers the hospitalization bill for however much it is charged for (up to a certain limit provided by the plan).

Hospitalization cover is relatively straight forward, being a yes or no proposition:

Yes, I have hospitalization cover in full OR No, I do not have hospitalization cover in full and potentially have to pay thousands and thousands of dollars for treatment should I have the misfortune of needing top notch medical care.

We can't stress the importance of this enough. Ever.

Did we ever tell you how important hospitalization cover is?
Could we tell you that again?

Critical Illness

Why?

Simply put, CI is more likely to strike you at some point than not. *in 2010, Over 85% of deaths in Singapore are caused by CI. You can bet your last dollar that many of them did spend money in an attempt to receive treatment.

Which begs the question: If I am already covered for hospitalization, why bother with CI cover? The answer is that you are unlikely to be in gainful employment while you are fighting the illness. Thus, you will need all the financial help that you can get, to ease the burden on loved ones and yourself.

Critical Illness

Hospitalization cover takes care of hospital bills, while CI cover can be used for treatment or meeting living expenses - in short, in any manner you see fit.

How much cover to obtain?

General rule of thumb - there is never enough CI cover to go around. But a starting cover of 300k is a good point to start.

Death, TPD and Terminal Illness

Death and TPD

Why?

Having taken care of your own immediate coverage needs, this section of the pyramid now focuses more on taking care of the people around you that may depend on you for financial support. In aircraft safety procedural ranking, you have already put on your own oxygen mask and are now ready to help others with their masks.


Having adequate cover for Death, TPD and TI will ensure that only you, but not your pay cheque will be missed. Besides, having TPD cover also ensures that you will at least have something to fall back on when disaster strikes.
Also in this category of cover are Personal accident cover, and Disability cover.

How much cover to obtain?

We say a good point to start with would be at least 3 times your annual income. There are many schools of thought here, but in general we would say - more is better than less.

Savings and Investments

Why?

Finally - the stuff that might make you rich. The icing on the cake, so to speak. We take care of our savings and investments needs only when we have properly secured ourselves for the worst case scenarios. Make no mistake, we have nothing against savings or investments, but we believe the priorities of cover must be set right.

Only when you have set your foundations strong would your financial situation permit enough security to take on additional financial risks that may provide higher potential returns.

Savings and Investments

How much cover to obtain?

Depending on your risk appetite and life goals, you may want to allocate up to 10-15% of your income towards savings and investment instruments. Savings and Investments can be done using insurance plans, or they can also be done with other vehicles

like Time deposits, Property, Stocks - it is really up to an individual preference.

Once constructed properly, your financial pyramid will (should) stand the test of time! Or at least until you get lucky at the Singapore Sweep.