Insurance

Everyone needs to buy insurance because it helps protect them from the financial consequences that they face in life. Shit happens, so be prepared for it.

There are a few major risks that you may face.

Death, sickness & accidents.

Death & life insurance

Why you need life insurance

There's nothing to worry about death. Once you are six feet under, you have no financial burden to worry about. The only worry you may have involves those who are still living - broadly your kids, spouse and parents. And it is for them which you buy life insurance for - so that in the event of your death, they will receive $ to feed themselves.

With the same logic, you don't need a life insurance that last you till 99 years old because you probably have no dependents by then. Your parents would probably be dead. Your kids should be able to feed & fend for themselves. Your spouse should hopefully have enough to last her till her grave too since she will take over the savings you leave behind.

As such, in most instances, you will only need a term insurance that last you till let's say 70.

Most insurance providers will offer to sell you a whole-life insurance policy which last you till 99 years old. So, they are over-selling you.

Regardless, if you have dependents, you will need life insurance. If not, you can do without it.

Cost of a life insurance

A term insurance is always cheaper than a whole-life insurance policy. Why? Because it doesn't have the bells and whistles that come with a whole-life policy.

For instance, a term insurance has no residual value. If you stop paying today, there is no value left to claim in the policy. A whole life policy will provide a certain residual value and it will grow across time. Isn't that great?

But stop for a moment and think - why is that so? Is the insurance company in the business of charity? Clearly not. The only reason why is because the insurance company charge you more - over and above the amount the cost of a term policy. And the excess amount charged is deployed into investments and a part of the investment returns is allocated to you to form your residual value.

So in essence a whole life policy = term life policy + an investment plan. 

If you are capable of investing your own $ (i.e. >4% returns p.a.), you should buy a term policy and invest the insurance premiums you save. 

If not, maybe its not too bad to acquire the whole life policy, though arguably it is quite easy to beat the returns offered by the insurance company. So you should, in most instances, invest yourself.

Sickness

As mentioned, there is nothing to fear about death. What is frightening is the process of getting there. 

Hospitalization. Critical illness (think cancer). Accidents.

Again, shit happen. And in each of these instances, you either face the risk of spending $ or the loss of income from work due to disabilities.

Buy now, not later

Broadly speaking, the younger you are, the lower the likelihood of you facing such issues. As such, the premiums are lower at a younger age and will increase as you age. 

Some may argue that since it is unlikely that I will face such issues, I should buy later. These people are too smart for their own good. The insurance provider has no obligation to accept you as a client. So what makes you think they will definitely accept you when you are deemed to be high risk? 

You buy insurance when you don't need it, because just in case you need it. And the provider is willing to bet that you don't need and sell it to you. But if you buy it only when you need it for sure, then as a businessman, nobody will sell you a policy to pay you a lot more than what you paid in premiums! You are a bad risk.

And once you are proven to be a bad risk - e.g. you suffered from cancer but recovered - you will be condemn for life. You will be hard pressed to find anyone to insure you.

So you should always buy sooner than later, when you are healthy rather than when you are not.

What do you need

--- Hospitalization ---

In most instances, you will need basic hospitalization coverage because the cost of hospitalization is high. If you get hit once, you face a huge outlow in $. 

To some extent this is provided for by the government through Medisave/Medishield. But that may not be sufficient as the Medisave/Medishield does not cover all costs. As such, if you can afford it, you can acquire a more beefed-up plan from private insurance provider. It is cheap for young people and you can pay part of it using your Medisave. It gets exponentially expensive when you are old, but it still pales in comparison to how much you will need to pay if you have to go in to the hospital.

--- Critical illiness ---

You should always buy a policy that cover critical illnesses as well because as mentioned above, if you suffer from it once and thankfully survive, you will almost never ever get covered. So, buy it first and pray that you never have to use it. And if you get hit, then hope you can recover by seeking medical treatment funded by the $ paid out by the insurance company.

Most critical illness (CI) coverage is provided through an add-on onto life policy. The add on is often known as a rider. If you are buying term life policy, an issue crop up here because the CI coverage only last as long as the underlying life policy. And you definitely want the CI to last forever, since you are more likely to need it when you are older rather than younger. The solution is to buy a stand-alone CI policy.

A stand-alone CI policy is oftentimes a better bang for the buck compared to a whole life + CI rider, even if you are unable to invest the savings you get well (as long as you don't lose $). But this view depends on a case by case analysis and comparison of policies, though I have generally found it true rather than not.

--- Personal accident ---

Most insurance agents advocate that you buy a personal accident policy as well. It is generally cheap so I have no issues with the idea. However, I note that the conditions for a payout is rather stringent. Basically, shit must really happen to you - for e.g. you lose both a limb and a leg - before you get paid.

--- Disability ---

There are certain disability plans which you should consider, especially for older people. Theses policies typically pay out when you hit X out of Y conditions (e.g. 3 out of 6) and these involves inability to dress yourself without help, inability to feed yourself, etc. This is particularly relevant for older people who are more likely to face such issues with age. 

The policy will pay a recurring amount for a certain number of years which will help pay for nursing home cost or a maid at home to take care of the person.

Again, the conditions for payout is rather stringent. So don't count on it as your only safety net. At the end of the day, cash is king. The policy only helps supplement.

If cash is king, why buy policy

Even though cash is king, the policy still pays out a lot more if it pays out. Think of it like buying a lottery ticket. Except in this case, you strike the lottery when shit happens. But regardless, the return on your investment is high. You get a good rate of return on your $ when the insurance pays out. 

Its about building up & modifying your coverage across time

You will almost never be able to be fully covered right from the start unless you have deep pockets. As such, the key is to stagger your way up. So you buy some when you are young to cover the basic risks such as life/CI/hospitalization and then you increase the amount with time as your income level goes up and you can afford me.

And because your life changes and your obligations vary, it make sense to stagger and build your coverage across time. For instance, if a kid comes along, your considerations will be rather different than 5 years ago. Or as you age, and have more health issues, you may want to consider a higher CI coverage, just in case. 

So the ideal coverage or mix of coverage for you changes across time as you. You just have to modify it across time. At the end of the day, you have to match what you need vs what you can afford and do the best you can with what you have.

In the meantime, accumulate more cash through working or investing because cash is king. To learn about investing, read this blog, join our course, or ask Jay.

*Disclaimer: I am not a financial planner and I have not taken the exams required by MAS to be one. The above are just my views and is not meant to be advice for you. Please form your own views and decisions or speak to a financial planner.