This article outlines the reasons to consider buying life or critical illness insurance, depending on your circumstances, and lists a few common pitfalls.
Target Audience
Any income-earning adult, whether:
1. a Singapore-based resident (expat / PR / citizen / EP holder), or
2. a resident of another S.E. Asian country (with the exception of Australia, Vietnam and Japan, due to regulatory reasons), as you are permitted to “fly to buy” a policy in Singapore.
What is “protection”?
The two most critical types of personal insurance I discuss with clients are life cover and critical illness cover.
The former pays a lump sum to named beneficiaries on your death, and the latter pays a single lump sum or multiple lump sums to you if you experience one of the standard list of critical illnesses (as defined by the Life Insurance Association in Singapore).
You can think of each as effectively being “insurance for your salary”, as your salary will stop:
- permanently in the event of your untimely death, and
- for at least an extended period if you suffer a critical illness.
Do I need Life or Critical Illness cover?
The decision on which main type of policy to consider is basically down to whether you have any financial dependents (e.g. spouse, children, aged parents); people who are reliant on your salary, besides yourself:
- If you do, then consider taking out life cover.
- If you don’t, then consider taking out critical illness cover.
It’s worth noting that life policies can include a critical illness element (called a “rider” in policy jargon) and, usefully, a “total and permanent disability” element (also a “rider”), so that the policy can pay out not only in case of your untimely death, but also, potentially, prior to that (whether through illness or through accident).
Common mistakes to avoid when choosing a policy
1. Excessive Coverage Period
Given that these policies are effectively covering you and/or your dependents for your loss of salary, it generally makes little sense to extend cover many years into your retirement (e.g. up to age 100). So, keep the term limited to your remaining number of years until retirement, or maybe a few years into retirement.
2. Excessive Sum Assured
The amount of cover that you and your dependents actually need requires some thought. Simply calculating this based on your full salary up until retirement is probably excessive, so it is best to go into some detail with a financial advisor, so as to come to a sensible conclusion on what is actually required.
3. Employer-provided Cover
I always suggest to clients that it’s best to think of the cover that their employer may provide as a “bonus”, for two reasons: firstly, because the sum assured is rarely adequate for your actual needs and, secondly, because this cover will suddenly end (leaving you and your dependents unprotected) if your job suddenly ends.
4. Procrastination
The younger you are when you take out a policy, the lower the premiums (which will stay constant for the term you’ve chosen e.g. monthly over 25 years) will be.
Conclusion
The protection of your dependents and yourself in case of death or critical illness should be the #1 priority for anyone with an interest in their own personal financial wellbeing, and certainly ahead of arranging investments.
With the right advice and the right policy, tailored to your actual needs, you’ll find that peace of mind can be surprisingly affordable.
Michael Davidson is a Singapore-trained and qualified Financial Adviser with Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to international and local professionals in Singapore.
Book a complimentary consultation here. Please quote reference “328PR”.
Global Financial Consultants Pte Ltd – Reg. No: 200305462G | MAS License No: FA100035-3
*Please note that Michael Davidson is not a tax specialist or accountant and that none of the content outlined here should be taken as personal advice. You should consult your tax specialist and financial adviser to review your current financial situation and futures goals to consider whether this strategy is appropriate for you. I expressly disclaim all and any liability to any person or organisation, in respect of anything, and of the consequences of anything done or omitted to be done by any such person in reliance, whether whole or in part, upon the whole or any part of the contents of this article.
