On Buying Insurance

Recently, a friend told me that she was approached by an insurance agent friend of hers, to get her to buy insurance for herself.

Thought I will give my thoughts on this matter. =)

If you're reading this, this is the updated version of what I explained to you.

Andddd a fountain pen in this picture too =D

I am a firm subscriber of BTIR (Buy Term Invest Rest), with some following notes:

• Term comes with a Rider
• You have Hospitalisation Insurance (which can be paid from Medisave) with a Rider if possible. 

This is applied on top of the Hospitalisation Insurance (with Rider if you want). I feel the Dependents Protection Scheme (DPS) is not very necessary. You can cut it to save your Medisave. This is my idea of a bare minimum coverage.

• Target ~5% annual income for total premiums per year (I personally prefer 2%)
  
• Maximum cap at 20% annual income (preferably not)
• Includes the sum of ALL insurance premium paid for the year, not just a single policy.
• Looking at coverage of 3-5 years annual income
• Say, annual income 40k, looking to insure 120k-200k
• 100k insurance is okay (assuming current annual salary 40k)
• Rationale: To cover your family and yourself for a few years without income while you or your family looking for jobs
• Options
• Term Life (I prefer this, there is a reason why “Term is what you buy and Whole Life is what you sell”)
• Cheaper, gives you adequate coverage + easy on wallet. Bang for buck.
• No cash value though
• Buy rider still decently cheap
• You are literally buying insurance. Most people cannot afford to be adequately covered by Whole Life or ILP due to costs, but can do so with Term Life.
• Limited coverage of years, look to cover until age 55-65 where family stable, kids grow up, no need to worry so much about providing for them.
• However, since it is limited, it is assumed that you invest the rest (explained more below)
• Can adjust premiums to cover more or less every year, some companies allow conversion to Whole Life when you want. (Ensure adequate protection)
• Whole Life
• More expensive, but got cash value (something like a regular savings plan)
• Cover to age 85 in general, look to cover 100k.
• Earns interest (but non-guaranteed), if pay until old, can use as retirement money I guess. You can loan out the policy but not recommended.
• You are buying insurance with a bit of “investment/savings”
• If you get the rider, eat into the savings (especially if you want to cash out at age 85)
• Breakeven usually at least 15 years (meaning cash value of policy = total premiums paid, assuming w/o rider)
• Premium fixed for life.
• Agents may tell you pay limited time only, then the interest returned can pay for premiums in the future.
• Good idea, but make sure you check every year. If interest not enough (say bad economy, etc), must top up, else it may automatically lapse and you wasted all your money ^^”
• Insurance-Linked Policy (BIG NONO)
• Premiums maintain the same rate throughout life but your insurance costs increase with time.
• Eats into your investment portion unless you increase premium yearly or every few years.
• Agents usually tell you when older, no need insurance, all go investments, but because of that you actually lose out because of compounding costs, from sales charges/management fees from funds and increasing insurance charges.
• Shifting late into investments means you have to take higher risks (which you don't want at an older age) to get the same return as starting early due to lack of a long time horizon for compounding interest to work the magic.
• Problem is it ends up as neither.
• Breakeven usually at least 20 years (meaning cash value of policy = total premiums paid, assuming w/o rider)
• Funds in the investments must switch from time to time to ensure decent returns.
• Suggestions
• If money is no issue, look for about 100k whole life without rider, then add term life with rider to cover the rest.
• Term life will expire around age 55-65, when you no need so much coverage but still got whole life cover bare minimum.
• Term Life coverage amount will look to revise the coverage every 1-5 years to ensure adequate coverage.
• IF REALLY GOT A LOT OF DOUGH, Universal Life :p
• Other way is more budget, Term Life, adjusted/revised every 1-5 years to ensure adequate coverage. (This method is the same idea as an ILP/Whole Life, except with lesser charges to give you the best deal for insurance and investments)
• Extra savings will go to (I assume minimal management)
  
  • POSB Invest Saver/OCBC Blue Chip Program to invest all into the STI ETF (low fees, looking at an average of 7-8% p.a. compounded), can be used with SRS account to reduce tax (ideal contribution is $250/month for ~35 years, to get 100% tax free, if you put in more, you'll just pay 50% of the tax that you should pay. I wrote an article about it here.
  • CPF Voluntary contribution -> SA if don’t want invest, alternatively Singapore Savings Bond also can (but I prefer CPF because of SA 4%, reduce taxes too!)
• Rationale: Since Term do not cover until old age, you want to build cash value, if possible, to be as close to 1 million as possible with housing fully paid, to protect yourself for life more or less.

Have a read and tell me what you think =)