Insurance coverage provides peace of mind for unexpected situations such as when you fall sick or meet with a mishap in life. Even though Singaporeans have some basic compulsory insurance plans such as MediShieldLife and Dependent Protection Scheme, the coverage is quite basic.
Hence, it’s recommended that you purchase additional private insurance policies. When buying insurance, you need to balance coverage with affordability. But what coverage to get? How much should you be spending on insurance on a month to month basis?
As a guideline, you should spend between 3% to 10% of your monthly take-home pay. This might mean that you have to get a term life insurance plan rather than a whole life insurance plan to get the coverage that you need, or customise your hospital plan accordingly.
For instance, Mr Lim earns $4,000 per month, and his annual income is $52,000. After CPF contributions, he takes home $3,200. This means that a good amount to spend on insurance is between $96 and $320 per month. This range is quite wide, as it will depend on whether Mr Lim has dependents and liabilities. We’ll go into the specifics by giving illustrations later.
And how should Mr Lim spend this amount? The four essential insurance coverage types that he should get are: hospitalisation, life insurance, disability and critical illness. We’ll help you understand the four types of coverage in this article.
1. Hospitalisation plan
Getting hospitalised is anxiety-inducing not simply because of health reasons. For many Singaporeans, the cost is also a big concern. This is why many purchase additional hospitalisation plans from private insurers above the compulsory MediShield Life. Also known as Integrated Shield Plans, they help defray the cost of staying at higher-level wards or private hospitals. Plus, a private hospitalisation plan can help cover pre- and post-hospitalisation treatment costs and you can also claim higher amounts overall.
Such plans can be paid with MediSave funds, which makes it even more affordable. Extra riders can also be purchased, albeit not payable by MediSave. Having a rider means that up to 95% of hospital bills are taken care of, depending on the plan.
2. Whole life or term life plan
Life insurance provides a payout for your loved ones when you encounter death or total permanent disability (TPD). The minimum coverage you should have is at least 11 times of your annual earnings. Using the same example, Mr Lim’s annual income is $52,000. The sum assured on his life insurance plan should be at least $572,000.
This guideline is good, however, each person’s financial needs are different depending on the number of dependents. A breadwinner from the sandwiched generation who needs to support children and parents definitely will need higher coverage than a young, single individual.
Let’s say Mr Lim has a five-year-old child and he also contributes $2,000 to the running of the household, which include things like utilities, tuition fees, allowance for parents and children, so on and so forth. We will add to that the total mortgage liability, which currently stands at $200,000.
We will use the ballpark figure of $2,000 to extrapolate the amount his family will need to get by comfortably without him. Keep in mind that the amount should cover until the youngest child reaches 23 to 25 years old, which is the age range where they would have finished university and can support themselves.
Assuming that he has separate savings for his child’s university fees, he should at least require a death coverage sum assured of $200,000 + ($2,000 x 12 x 23) = $752,000. As you can see, this is higher than the “11 times” guideline, because Mr Lim has more liabilities.
If he and his wife goes on to have more children, and the mortgage liability drops over a period of time after monthly instalments, the coverage required can be reviewed again.
Does that mean that a single bachelor or bachelorette will not need to buy insurance? No, often, singles also need to support their elderly parents. If they also plan to have children or own a house in the long term, getting life insurance early can help secure cheaper premiums, simply based on the fact that younger individuals have lower risks of falling sick.
3. Disability insurance plan
Aside from being hospitalised or facing death, getting disabled can also be a huge blow on your finances, as it may mean that you will lose your job. To make matters worse, you may even need to pay more for treatment. As such, disability coverage is one of the essential types of insurance you should have.
Total permanent disability (TPD) is usually covered in life insurance plans, but it is extremely stringent in that you have to be totally disabled and not able to work in any occupation for a period of at least six months.
If you become partially disabled, or suffer from a disability that doesn’t allow you to work for five months, you will not be able to make a claim. Unless, you have disability income insurance.
Such a plan usually provides a monthly income payout after two to three months, and covers for situations where the insured cannot carry out specific duty within his or her occupation, rather than “any occupation”, in the case of TPD. The payouts are usually up to 75% of the insured’s monthly income, and provided until the insured makes a full recovery or until 65 years old.
Aside from rehabilitation costs for each disability, a disability insurance plan may also top up on a lowered income. If, after being disabled, you have to take on a lower-paying job, this can come to a blow to your family. The plan will then help to ensure some financial stability during this time. The plan also provides a lump sum payout in the event of death or TPD.
To calculate how much coverage you will need, use monthly expenses plus your own basic expenses. For our Mr Lim, let’s say he spends an additional $500 in a month on personal expenses such as dining out, grooming, healthcare, and so on, on top of the $2,000 that he contributes to his household. This means that he should aim for at least $2,500 a month in monthly payouts when considering disability income insurance.
4. Critical illness plan
Contracting a critical illness such as diabetes or cancer will entail many visits to the doctor. Even if you have secured a hospitalisation plan, which will help you defray hospitalisation bills, make sure that you also cover your bases by getting a critical illness plan. It will compensate a lump sum for the insured to seek treatment without worrying about finances.
According to the Singapore Cancer Society, “about 39 people are diagnosed with cancer every day, 15 people die of cancer every day, and 1 in 4 people may develop cancer in their lifetime.” So, definitely do not write it off as a rare occurrence. Also, ensure that you also get early critical illness plan coverage because otherwise, you will only be able to claim when your cancer advances.
As a guideline, one should aim for 12 months of income to be paid out in advance for early critical illness. In Mr Lim’s case, that would be $52,000. For advanced critical illness, he should aim for a payout of three to four years to cover income loss and medical expenses, which brings the amount to between $156,000 and $208,000.
Do you relate to Mr Lim’s financial background? Or do you have more children and more liabilities? Everyone’s situation is unique, but you don’t have to figure it out all on your own.
To understand more about how you can leverage and compare various insurance products in the market today to provide comprehensive coverage for your needs, speak with our FA today.