Shopping for insurance is a bit like walking through Sim Lim Square. There are the good plans that you need and are really useful for your life. Then, there are those that you should avoid like the plague. A financial planner spills the beans.
Words by Seng Bingyang
If you are like most young professionals I know, you would have been approached by an insurance agent at some point in your life. He or she could have been a random stranger who stopped you on the streets or even your friend, offering seemingly amazing insurance policies.
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But, can you be sure which policies you really need and which ones you don’t?
Most of us are aware that it is financially detrimental if we delay our decision to purchase an insurance policy. Yet, we don’t want to be suckered into buying something that we would come to regret in the near future. Assuming you are single, working in a stable job with an increasing income, and your parents’ retirement do not rest on your shoulders, the following are three policies that you ought to seriously consider:
- Hospital and Surgical Plan (Shield Plan)
Also commonly referred to as MediShield or a Private Integrated Shield Plan, this helps to reimburse the majority of your hospital and surgical expenses.
Medical costs today are on the rise, and it is a challenge to determine how inflation and technological advances will affect medical costs. A large medical bill can easily wipe out your hard earned savings while a smaller bill might delay your ability to fulfil certain financial obligations and hold you back from attaining your goals.
As premiums are taken from your Medisave account, many opt for the premium private integrated plan. While there is a lot of value in having the top plan in the marketplace, it is also important to be aware of how much your premiums increase as you age. There have been instances of people being able to afford a good plan today. However, their Medisave dollars rapidly deplete as they get older, at a period when the odds of them requiring medical services are higher!
- Critical Illness Plan
After hospital expenses, you should look into obtaining adequate critical illness cover.
This plan pays out upon diagnosis of any one of the 30-odd critical illnesses such as major cancers and stroke. While your Shield Plan helps to cover your hospitalisation bills, a critical illness plan will, to a large extent, cover your outpatient and medication expenses, nursing care, food, and lodging.
When you are critically ill, you may not be able to work and the last thing you want to do is to become a financial and emotional liability to your ageing parents. While your parents will likely continue worrying and caring for us, receiving financial compensation during such trying times can go a long way in reducing the stress lines on their faces and yours.
- Disability Income Plan
As previously discussed, while you are recovering from your critical illness, it is highly unlikely that you are able to go back to work.
According to researchers, just over a quarter of today’s 20-year-olds will become disabled before they retire. In Singapore, salaried workers are legally entitled to up to 60 days of paid hospitalisation leave and 14 days of paid outpatient non-hospitalisation leave. However, beyond that, should your disability render you unable to work, this means that you will no longer have an income. Meanwhile, you still have your long-term liabilities and commitments to service such as your home mortgage.
When disability strikes, it is a huge blow to all of your plans. However, having a proper disability income plan in place will help soften the blow. The plan pays a percentage (pre-determined by you) of your income in the event a disability causes you to not be able to work, and thus results in you losing your income.
Having discussed three crucial policies that young professionals ought to consider purchasing, I want to highlight two popular policies that this group often purchase as a first policy but do not really need if the above three needs are yet to be taken care of.
- Investment Linked Policies (ILPs)
This is a topic that frequently causes people to get into heated debates.
Personally, I do see the value an ILP can bring to a young professional. Benefits include having a range of investment funds that commensurate with your risk appetite, and having the flexibility to vary the plan’s insurance and investment elements when your financial needs change. You may also temporarily cease paying premiums while maintaining your policy coverage.
However, insurance charges commonly increase as you grow older, as the risk of us falling ill and/or dying increases with age. Should your investments underperform, the value of the units in your policy may be insufficient to pay the increasing insurance charges, resulting in you having to increase your premium payment or being forced to reduce the insurance coverage at a time when you actually need the cover.
With these uncertainties, I tend to err on the side of caution when it comes to buying my first policy. I would prefer to separate my investment plans from my insurance purchases, so that one will not have a direct bearing on the other.
- Early Stage Critical Illness Plan
I’ve noticed in my exchange with young professionals that many actually seek to own this policy. Unfortunately, oftentimes, they don’t really know why they need it, so I’ve come to the conclusion that perhaps this is a result of peer pressure.
An early stage critical illness plan provides coverage for critical illnesses at various early stages. What this means is that claiming on this policy is relatively less stringent compared to the aforementioned Critical Illness Plan, which only pays out during the critical stage. In the event of a claim, an early stage critical illness plan tends to pay out a percentage of the total sum assured of your policy (depending on the stage of your critical illness).
How then do you determine if you need this policy?
I’ve realised that what people actually fear is that they might lose their work income if they are struck down with a critical illness. Yet, they do not want to risk not being able to claim compensation should their critical illness be discovered at an early stage.
However, it is helpful to realise that an early stage critical illness rarely hits you so hard that it takes you out of the workforce entirely. Therefore your financial plans would not really crumble under such an event.
Obtaining a pay-out due to an early stage critical illness would certainly be useful and would definitely help you to breathe easier, but note that this policy should not be purchased at the expense of the three crucial policies we previously discussed.