Financial Planning (3) - What risks to insure against?

Insurance is available to cover the following risk:

a) risk of premature death
b) medical expenses
c) disability

You need to insure against premature death during the time when your children are still young. This insurance will provide a regular income to your family until all your children have grown up and have started to work.

You should buy term insurance, as just provide pure coverage (not combined with savings), and the cost is quite low.

You should have insurance to cover you up to age 60, or for a period of 25 years (if shorter). The cost of insurance increases according to the period of insurance, i.e. you pay more if you want to insure for a longer period. You should avoid paying a higher premium than is necessary.

You should insure for an adequate sum. It can be 10 years of your earnings or to provide 50% of your earnings each month for the remainder of the period of insurance.

For example, if you earn $40,000 a year, you can buy insurance to pay $400,0000 on premature death or to pay $2,000 a month for the remainder of the period of insurance. If you insure for 25 years and death occurs after 15 years, the monthly income is payable for the remaining 10 years.

You can buy an insurance policy to cover your medical expenses. In choosing the suitable policy, you should consider the coverage and the cost. The insurance that offers the best value for money is the basic Medishield offered by the Central Provident Fund.

If you buy a private Shield plan, you may get 50% more coverage, but you have to pay a premium that is 100% more costly. If you are well off, you may not mind paying a higher premium. But, if you do not have adequate savings for your future needs, you should avoid wasting the money on expensive, unnecessary insurance.

If you are covered under basic Medishield and you wish to be treated in a private ward, you can pay the uninsured expenses out of your savings. The risk of this happening is likely to be quite low.

Disability insurance will pay you a monthly income during the period that you are disabled due to accident or sickness. You have to consider the cost and benefit of this insurance, and the chance of making a claim. If the insurance is too expensive, relative to the chance of making a claim, you can carry this risk on your own. If you are disabled, you can draw down on your savings and replace the drawdown in the future.

to recap: consider the benefit, the chance of making a claim and the cost. Insurance is costly, so you have to choose an insurance coverage that gives you good value for your premiums.

Tan Kin Lian