Friday, 28 August 2015

Insure yourself before Investing

Before investing, it is always important to insure yourself. This is because you are the most important asset with the ability to generate income. Therefore, it is vital we insure ourselves against unfortunate events which may render us unable to earn income, in turn deplete our savings.

Hence what are some of the insurances we should purchase at the various stages of our life cycle?

Studying Years (Infants to University Undergrads)

During this stage, the first thing to buy is a health insurance. This is because illnesses or accidents may strike us at any time and the medical cost to treat you can be costly. Should you be uninsured with a health insurance, the medical expenses may deplete your savings/investments and perhaps even your loved ones.

For Singaporeans, we will soon be covered under a health insurance scheme called the Medishield Life. It provides us a basic coverage for our medical expenses and should be sufficient. However, if we wish to have more coverage for hospital treatments due to illnesses/accidents or stay at a better ward, one may consider upgrading to the various health insurance policies provided by insurance companies. It will be good to get the best coverage for health insurance plans when one is young because the premiums are cheaper then. If it gets too costly when one is older, the coverage can be reduced to pay lesser premiums.

I will like to stress that health insurance is essential throughout all stages of our life.

As for life insurance, I will strongly advise against it at this stage of life. This is because the purpose of a life insurance is to bequeath a pay out to dependents that are reliant on your working income for their living expenses. Hence if you are a child, who is studying, it is unlikely you will have dependents and be without much earning power. To put it bluntly, there is no income loss should the child pass on and hence buying insurance to insure against such event is irrelevant.

Starting out at work

At this stage, a medical insurance will suffice. As for life insurance, you will have to assess if there are any dependents (e.g parent not working) that are now reliant on your working income. Often, there will be none during this stage of your life; hence life insurance is not needed yet.

Married Life /owning a home

At this stage, this is where other forms of insurance are needed. Upon owning a home, one should get insurance. This is because should you be permanently incapacitated or die prematurely before your housing loan is fully paid, your partner will be burdened with paying the outstanding housing loan amount alone. For HDB flat buyers, the government has a mortgage reducing insurance which protects against such events; it’s called the Home Protection Scheme (HPS) and can be funded by your CPF savings or cash.

In addition, with your spouse or child now part of your life, there are dependents reliant on your income for sustenance. Hence a life insurance policy is needed. Some common examples of life insurances are term, whole and endowment policies.

How much to cover?

There is no definite number because it depends on the expenses of your dependents. Generally, it will be good to be covered for 3 years of your working income, rounded up to the nearest $100,000. If your child is relatively young or you have many dependents, it may be wise to insure up to 7 years of working income. This is because the key purpose of having life insurance is to cover the living expenses of your dependent. Protection against liabilities such as housing loans should have been covered by the HPS or similar housing insurance.

Retirement Years

See “studying years” life stage. Furthermore, your child by then would be independent and have started working. No life insurance should be bought at this stage.

A Disclaimer when buying Insurance

While it is tempting to just sign on the dotted line to purchase insurance, one should read carefully the policy document that comes with it. This is because each policy may have different sets of exclusions and coverage. Some policies may not insure you for example, accidents arising from competitive racing or have conveyance limits. So please read these documents before signing.

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