Being a first-time parent is truly an indescribable feeling and an exciting experience. It also comes a new set of responsibilities. With a little one now fully dependent on you – mentally, physically, and financially, it amplifies the necessity for you to plan a roadmap for securing your financial future.
Our ultimate guide covers the essentials of financial planning and burning questions of first-time parents. Learn about the various types of coverage and investment options for your personal finances and gain some context from which to make more complex and individualised decisions.
What is financial planning?
Financial planning is exactly that: managing your income and expenses. In this current day and age, it’s not enough to just accumulate your salary; it’s also important to grow and protect your wealth to combat passive inflation.
The basic steps of a financial plan include saving, protecting, and investing.
For new parents, it’s important to think about your goals for yourself and your family, as well as your personal priorities. In Singapore, common goals include:
- medical coverage for accidents, injuries, illnesses,
- your children’s educational funds, and
- your own retirement needs.
Ask yourself what you and your family want to achieve in the next 5, 10, and 20 years. Next, decide what level of risk you can take with your money – for instance, families with no dependents may be able to take higher risks as there are fewer people depending on extreme financial stability. On the other hand, if you have dependents, a more moderate approach may be better.
Consider whether your current career and income streams can support your financial goals as well. If not, consider whether you might be able to adjust it to support your goals.
Lastly, list down specific goals, and the actions you will take towards achieving them – perhaps you want to retire at 50 or earn a certain amount of money to cover your children’s university educations. You can use available templates online to make these calculations andcalculate the sums you need to save or invest to get to those goals.
Emergency Funds – What are they, and why do I need them?
This section covers the first step of financial planning – saving. The first task for couples looking to start a family, new young parents and even current parents included, is to know how much money your household is spending regularly, and then have six months’ worth of expenses in your bank account. This provides a buffer in life in the event of unforeseen emergencies – for instance, retrenchment or hospitalization.
Always ensure that your expenses are well under your take-home income (some use the 60-40 method, where 40% of their income is saved and 60% of it is spent). Try not to let any debts go out of control as well, be it credit card debt, student loans, or car loans. In essence, you must live within your means.
This is the first step – while saving is important, it is no longer sufficient in the current age. As such, we begin to look at protection and investment to help grow your finances.
After you’ve met your savings goals, sufficient life and health insurance coverage is imperative. Insurance coverage compensates you or your family for unforeseen circumstances that may cause you to lose your income, including death and permanent disability.
As a young person with a clean bill of health, you have lower insurance premiums because of the concept of risk pooling: since the risk of a young person contracting a major illness is lower, you pay less than someone who is older than you, as they would have a higher chance of contracting an illness. This is why, when you are purchasing insurance, your financial planner has to go over an extensive form covering a wide variety of factors – from your demographic (age, sex, etc.) to your health habits (smoking habits, genetic history of illness, prior diagnoses). These factors are weighed, and those who are younger, with healthier lifestyles, often end up with much lower premiums – buying insurance policies while you are young can potentially save you money in the long run.
If you do not currently have any plans, the first policies you should be looking into getting are:
- life insurance (pays out in event of death),
- hospitalisation insurance (covers hospilisation bills, coverage varies from plan to plan)
- critical illness insurance plans (pays out in event of critical illness, helps you cover treatment fees)
When these are settled, you can look into additional growth instruments, including things like investment-linked policies if it suits your needs.
Whole Life Insurance
Whole life insurance provides compensation for the loss of your life, or total permanent disability (TPD), all the way until the end of your life. Most whole life plans, excluding ‘term insurance’, have a surrender value, which is the cash amount offered to the policyholder upon the cancellation of the contract. This means that it technically can be used to grow savings as well.
Term insurance also provides compensation for the loss of your life or TPD, but only for a fixed period, such as 30 years. After the plan expires, there is no surrender value. As such, the premiums are also cheaper, despite offering equivalent sum assured amounts.
Critical Illness and Early Critical Illness Plans
Statistics show that 1 in every 4-5 Singaporeans may develop cancer in their lifetime. This doesn’t include the likelihood of other common diseases, including heart issues, diabetes, stroke, or organ failure resulting from age.
At the onset of a critical illness, you will be paying a lot more money for treatments over a long period of time. Critical illness plans offer you multiple payouts and higher coverage for key critical illnesses, but only for advanced stages of the illness. Early critical illness plans provide more comprehensive coverage and provide full payouts for early and intermediate stage critical illnesses.
Insurance for child critical illness or early critical illness can also be important, especially if there is a history of certain inheritable diseases from either parent – for instance, some parents with a history of early-onset heart disease may buy critical illness plans for their children in case this develops. The same goes for newborn insurance or baby insurance in Singapore (different from maternity insurance). For baby insurance Singapore comparison, please do refer to our site for additional information
Which should you choose? Endowment vs Term vs Whole Life Plan
Life insurance provides you peace of mind by providing for your dependents should anything unfortunate happen. It is highly recommended and known to be a must-have for when we start a family.
To start planning for your protection, it is important to first determine how much coverage you need, and the next step is figuring out the type of life insurance you wish to adopt. When considering, three types of insurance come to mind, endowment, term, and whole life plan. There are three considerations, duration of coverage, purpose, and cost when deciding between them.
In short, one general difference is that endowment and whole life accumulate cash value, unlike term life insurance. We will delve deeper into which is most appropriate for your given situation.
Comparison of Life Insurance Types
Types of Insurance
|Term life insurance||Whole life insurance||Endowment||Whole life insurance (investment-linked)|
|Objective||Protection for death, TPD & early to advance Critical Illness||Protection for death, TPD, early to advance Critical Illness & grow savings||Growing of wealth/ Retirement||
Protection for death and TPD and grow money via investment returns
|Sum assured||Sum assured and accumulated bonuses||Lump sum/ Steady Stream of Income at a chosen age/ Lifelong accumulation||
Sum assured and value of units in fund
|Surrender value||Nothing||Guaranteed and non-guaranteed bonuses||Guaranteed and non-guaranteed bonuses||
Value of units in investment sub-fund
|Coverage||A Specific Term||Up to end of life||Can be specific number of years or end of life.||
Can be specific number of years or end of life.
|Fixed term||Until the end of life||Fixed amount of years or Life long||Until the end of life|
|What is paid out if you surrender the policy early||No Cash Value, flexibility of ceasation.||Cash Surrender value (guaranteed and non-guaranteed bonuses if any)||Cash Surrender value (guaranteed and non-guaranteed bonuses if any)||
Cash Surrender value (non-guaranteed bonuses only)
Endowment plans are policies designed to help you save and grow your wealth with at a good rate. They provide strong returns, are heavily regulated, and very low risk. Endowment plans allow growth of wealth at rates much higher than what a bank or fixed-deposit plans can offer.
Most endowment savings plans are capital guaranteed upon maturity, which means that you are guaranteed to get back at maturity a part or the totality of the money you invested on day one. Your savings are therefore protected in event of death, and most include critical illness and cancer coverages too. This ensures that you don’t lose your wealth while investing.
A disability income plan protects your income if you become unable to work due to early-stage critical illness and partial disability, especially if you still need to provide for your dependents and monthly expenses.
This differs from Total and Permanent Disability (TPD) plans – disability income plans pay out monthly to replace income when you are unable to perform your own occupation. TPD plans pay out in one go upon event of total and permanent disability, as a form of remuneration.
Hospitalisation insurance, also known as ‘medical insurance’ or ‘health insurance’, basically covers hospitalisation fees.
By default, all Singaporean Citizens and Permanent Residents are covered with the government-provided MediShield Life, administered by the Central Provident Fund (CPF). This is a compulsory hospitalisation plan that provides basic coverage if you are admitted for a hospital stay. Premiums are deducted from your MediSave account, and lower-income households can enjoy premium subsidies.
MediShield Life is limited to public hospital wards in B2 and C areas, which are considered the most basic rooms in Singapore’s public hospitals – around $700/day for normal wards. At this level, chemotherapy coverage is around $3,000/month as well. There is a maximum amount that MediShield Life will pay out every policy year as well (365 days from the starting date of your coverage), which is $100,000. The policy also does not include pre- and post-hospitalisation charges (e.g., diagnosis).
This does mean that any fees incurred over the cost of coverage must be borne by the patient or their family. To boost your coverage, Integrated Shield Plans (IP) from private insurers can be purchased – they cover Type A and Type B wards in both public and private hospitals and can thus assist in covering more of the expenses.
Investment-linked policies have a life insurance component and an investment component. Your premiums pay for units in one or more sub-funds. Then the units purchased are used to pay for the insurance, while the remaining are invested.
Due to the uncertain nature of markets, ILPs do not have any guaranteed cash value. The value of the units you buy with your premiums also depend on the sub-fund’s performance, and you bear full investment risk.
An ILP can offer you flexibility as to which sub-funds to invest in, and you can also reduce or increase coverage along the way; as such, they are suitable for those who already have existing coverage and are interested in transitioning to the last step of financial planning: investment.
Who Should Buy Term Life Insurance?
Term insurance policies offer more affordable premiums, which make them suitable for young working couples that do not have a lot of disposable income.
It can also be suitable for older parents above 45 years old (for example). A term plan may provide higher coverage taking into consideration coverage until 70 years, as compared to a whole life plan.
Who Should Buy Endowment?
Endowment plans are commonly used for specific savings goals, like a college savings plan. Such plans can be bought even before your child is born and can be subsequently passed over to your child. Endowment plans may be better compared to whole-life insurance due to a long-run rate of accumulation.
Who Should Buy Whole Life Insurance?
Whole life insurance may be more suitable for individuals who can comfortably afford the premiums and wish to leave behind an inheritance for their family. If you are planning on getting one, it is great for young parents without any existing coverage and with a child less than one. This is the best time to get the plan as it increases in premium if you get a later age.
When your kids are old enough to start taking over the plans, the whole life plan is probably almost paid in full, which allows them to add on term plans if they wish to increase their coverage.
We would recommend pairing the Whole Life plan with Early Critical Illness. Additionally, if you can afford and wish for more coverage, multiple pay Critical Illness is also an option, albeit its a kind of term insurance.
Is Critical Illness Coverage Really Necessary For My Child?
A Critical Illness (CI) plan is an insurance plan that pays out a lump sum of money when the insured individual is diagnosed with an illness covered by the policy. The money is paid out to the policyholder and it is not dependent on the medical or hospitalization cost. This helps you compensate for lost income if you are required to take a leave of absence to stay at your child’s side.
Oftentimes, children are forgotten when purchasing a CI plan as it is a common belief that the risk of contracting a critical illness as a child is relatively low. However, purchasing one would give you peace of mind, and a valuable safety net when you need it the most.
Critical Illness (CI) vs Early Critical Illness
CI insurance usually provides coverage for severe or late stages of CI. While they are essential in cushioning the financial impact upon the diagnosis, it excludes payouts upon the early stage diagnosis of a CI. Early CIs on the other hand extends the coverage to cover the early stages too, including increased health screenings. It is recommended to purchase early CI for kids as it is highly affordable.
Also, CI plans are income protection plans. Getting Early Critical Illness coverage for children even though they are not working protects the income of the parents. Hence even though standalone CI plans are term insurances, parents can consider covering the kids until they are financially sustainable, to protect the parents’ income.
Single Pay vs Multi Pay CI
Conventional CI policies work on a single-claim basis. This means it provides a lump sum payout upon a critical illness diagnosis. A multi-pay CI plan comes in handy in situations where a CI recurs later in life after a first claim, or an individual unfortunately is struck with a second CI. Multipay plans provide several payouts upon diagnosis, which helps fund early treatment costs, as well as longer-term needs, should relapse occur.
A multipay CI is not as essential for a child as compared to someone older. An early CI will provide much-needed coverage. When your child gets older and starts working, he or she may then consider a Multipay CI. However, that should not stop you from getting a Multipay CI for your child if they are already covered for private hospitalization, accident, whole life, and education savings.
Maternity insurance is a single-premium insurance policy covering unexpected complications arising from pregnancy, which could affect either mother or child. This usually provides a lump sum payout if an insured event occurs. This comes in handy to offset additional medical costs if pregnancy complications were to happen.
Expecting mothers can buy the policies from as early as 13 weeks of the pregnancy. If you are already intending to buy maternity insurance, we suggest to get it as early as possible so that you enjoy a longer coverage for the same premiums.
Benefits of Bundling a Standalone Maternity + Whole life/ Endowment plan
Bundling a standalone plan together with a whole life or endowment plan might be more affordable than pre-packaged bundled plans. The former would allow the parent to transfer the insurance plan to the newborn without medical underwriting. This way, the baby can still be insured even if medical conditions are present.
Unlike in prior generations, accumulation is no longer sufficient to keep up with regular inflation, rising cost of goods, and long-term plans. Investment becomes an essential part of any financial growth strategy, utilising your saved funds to earn more and thus prepare you for your financial goals. Whether you are saving for a baby, buying a house, or planning for retirement, investment strategies are important to understand and master for the average young adult.
Once you have completed the first two steps of saving and protection, you can (and should) begin to invest. There are a huge variety of instruments for this, including unit trusts, stocks, shares, ETFs, and endowment plans; each of these offer different returns and risk levels to suit your needs and taste.
Stocks and shares are higher risk. They will require you to understand the companies that you are investing in, and your investment value fluctuates with market conditions. Safer options include endowment plans, where there are typically guaranteed returns (even if they are lower than the sum of premiums you paid).
With every investment, make sure you understand the mechanics and are committed to the risk involved. Then, you can choose the best investment brokerage account to start trading.
What insurance should I get for my child?
While the coverage should vary based on your individual situation, there are certain basics that you may want to consider obtaining, including critical illness, whole life or term insurance, and hospitalisation insurance. Some may potentially recommend total permanent disability insurance (TPD) to be included as well – as before, the composition of the insurance should depend on the health of your child.
How much insurance is enough?
There are two things that should be balanced when purchasing insurance: the first is how much coverage you want, and the second is how much you can afford to pay for insurance. Some people pay thousands of dollars to get extensive coverage, while some will try for the minimum to alleviate their worries. This is a conversation to best have with your family members considering your personal and family finances, and a decision that you should make for yourself.
Not sure what to do?
The birth of a child will bring immense joy to the family; and a parent will want to make the best decisions for their child which includes a tailored financial roadmap to secure their present and future. Considering which type of insurance to purchase really depends on the unique needs, affordability, and priorities of each individual. One way to evaluate would be to look at the three considerations we have mentioned above: duration of coverage, purpose, and cost. Regardless of whether you are a new at financial planning or have one in place, get professional advice to help you find the best insurance or investment products.
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