Many Singaporeans are either under-insured or over-insured. This is because they are simply not aware of how much coverage they need. Especially for young professionals who have just started working in their early 20s, insurance is usually not one of their priorities. Yet, it is the best age to buy as premiums are the cheapest.
Working adults should review their insurance coverage from time to time, just like how a dentist checkup is recommended every 2 years. When was the last time you looked at your policies? If it has been more than three years, it’s time for a policy review.
Here are the steps to take in order to understand how much life insurance coverage you need.
Step 1: Know your liabilities
Liabilities comprise bills, loans, expenditure. Use pen and paper, or if you like, an excel spreadsheet for easy calculations. Note down how much you spend in a month. The purpose of doing this is to understand how much coverage or payouts you or your loved ones will require when you lose your job, or even your life.
Say for instance, Kenneth is a 30-year-old young working professional who is single and still living with his parents. He has a car loan and a student loan. After writing down his expenses, he figures that he spends $1,320 a month on essential expenses. He has loan liabilities totalling $50,000.
|Type of expense||Amount|
|Transport – petrol, and other car expenses||$300|
|Entertainment and dining||$600|
|Allowance for parents||$300|
Now, it’s time to know what to buy.
Step 2: Find out which plans to get
Before you look at things like endowment or insurance plans, make sure you secure the four basic types of insurance: life insurance, early critical illness and critical illness, disability and a hospital plan.
Life insurance: The purpose of life insurance is leave behind a sum of money for your dependents in the event of death. Thus, the more children and parents who depend on you for income, the higher sum assured you require. To calculate how much sum assured you need, factor in mortgage payments and other loan repayments, the financial help your spouse or parents would need, as well as your children’s essential expenses until they reach adulthood.
You can choose from a whole life plan or a term life plan. Term life is usually more affordable, but it only covers for a fixed number of years. Whole life plans have cash value, so in a way, they can help you save too. Read more on the differences between term and whole life insurance.
Early critical illness (ECI) and critical illness (CI) insurance plans: Having a critical illness means that you may need surgery, chemotherapy, immunotherapy and so on, which takes time. ECI or CI plans offer a lump sum payout so that you can choose to quit your job and recover comfortably. Aim for 2 to 3 times of annual income for early stage of critical illness and 7 to 10 times of your annual income for advance stage. The reason is simple, to fully recover from an early stage, the time needed will be 2 to 3 years and likewise for advance stage CI, will be usually around 10 years.
Total permanent disability (TPD): TPD is a permanent condition where you are fully disabled. In such a case, you might not be able to go back to work. Even if you can work, you will likely have a lower income. Your loved ones may then face a financial burden on top of caregiving for you. As such, make sure you get total permanent disability coverage that covers your lifespan. For males, that will be until 85 years old and for females, that will be until 87 years old. Multiply the number of years you have until then by your yearly expenses.
All Singaporeans have either ElderShield or CareShield Life (if you are born in 1990 and earlier). Ensure that you upgrade your ElderShield supplement to receive a lifetime of coverage, if you qualify, upgrade to CareShield Life when it is available.
Hospitalisation plan: Thankfully, everyone has a mandatory hospitalisation plan in place which is MediShield Life. Insurance premiums are deducted from your MediSave. But if you want a plan that is more all-rounded, has higher limits and covers pre- and post- hospitalisation fees, then you might want to get better plans and riders from a private insurer.
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Step 3: Calculate how much coverage you need
This is where you start calculating based on your current liabilities and monthly essential expenses. Here are some guidelines as to how much insurance coverage you need.
|Type of coverage||Payout / Sum Assured||Purpose|
|Life insurance||Mortgage and other loans, amount your child needs times years to adulthood, financial help for spouse and parents||Help your loved ones tide over financially when you pass away|
|Total permanent disability||Male: (85 – age) times yearly expenses
Female: (87 – age) times yearly expenses
|Replace your income to pay for the expenses until the end of your life|
|Early Critical Illness||2 to 3 times of yearly income||Replace your income as you recover from your early-stage critical illness|
|Critical Illness||5 to 7 or even 10 times of yearly income||Replace your income as you recover from your advanced-stage critical illness|
|Hospitalisation insurance||Depends on your preference when it comes to being hospitalised||Ensure you pay less when you are hospitalised|
Let’s use the example of Kenneth, who spends $1,320 on essential expenses, and has loan liabilities totalling $50,000.
We’ll start with life insurance. As he is a young adult, Kenneth doesn’t yet have dependents or a mortgage loan. But he contributes allowance to his parents, who are semi-retired, growing older and appreciate his financial support. He also has plans to apply for an HDB BTO flat with his girlfriend. Assuming that Kenneth would like to support his parents for another 30 years, that would mean at least $108,000. He can add on more if he would like to provide more for his parents. He must also factor in his loans. Thus, at the very least, Kenneth requires $158,000 as his sum assured. If he wants to plan ahead, he can add on a possible mortgage loan of $300,000, which adds up to $458,000 if the plan is still within his affordability.
For TPD, he still has 60 years until he turns 85 years old. His yearly expenses are $15,840. Hence, he should aim for a payout of at least $950,400.
For ECI, he should get between $47,520 to $79,200 and for CI, he should get between $79,200 to $110,880 based on expenses. If he has a monthly income of $5, 000, this accumulates to $60, 000 of annual income. In the event of early stage critical illness occurring, a payout of $180, 000 (3 times of his annual income) can last him 3 years with him taking a break from work for at least 3 years, to fully recuperate and recover from his early stage illness.
Of course, these are just rough estimates. He should review these amounts as he assumes new responsibilities along the way.
Step 4: Evaluate affordability
The next step is to find a plan that is affordable for Kenneth. This is where he should speak with financial advisors, research and compare to find the best plan for his coverage. The financial advisor would be able to advise the best way forward, in terms of premium terms, brands, fees and charges, and so on.