Insurance is a key part of Trio Retirement Plan. While we work hard, save and invest wisely to build up our retirement income, we need to take care of all the “What if” scenarios so that it provides minimal disruption to the retirement plan.
Insurance premium is a necessary expense under the EXPENSE “O”. However, insurance premiums are not cheap and how should we prioritize? What kind of insurance we should buy first and how much should we cover ourselves for? Should we go for term or whole life insurance?
We will answer the above questions in the Singapore context. Different countries may have different healthcare plans. However, the general principles may be applicable for any countries.
The first insurance we should buy should be healthcare insurance. Healthcare cost can be a major expense if anyone in the family falls sick. In Singapore, there is a basic Medishield plan which is provided for all citizens. We should buy an Integrated Shield plan on top of the Medishield plan for additional coverage. We should choose a plan that we are comfortable in paying. If a family has a new born, the family should insure the new born as soon as possible. Everybody should buy this insurance as early in their life as possible and when one is healthy. If not, the insurers may not agree to provide coverage or choose to provide coverage with exclusions once there is some preexisting conditions.
The next insurance to purchase will be a critical illness plan. Critical illness plan pays a lump sum upon diagnosis of a critical illness. This is important to any one who has started working and especially those with dependents. When one falls sick, although the healthcare insurance takes care of the major bulk of healthcare cost, the critical illness plan can take care of any portion not covered by the healthcare insurance and provide a buffer if one has to stop working due to the illness.
There are term or whole life plan for critical illness. Term plans are more affordable than whole life plans and can usually cover a person up to 70 years old. With a fixed budget, prioritize the coverage value (the lump sum that will be paid out) over whole life coverage.
As an illustration, an middle income employee makes $60,000 per year. In the event of critical illness, he/she wants to make sure that he/she can cover 4 years of salary in case he/she cannot work. So the coverage value needs to be at least $240,000. He/she may find it more affordable to purchase a term critical illness plan than a whole life plan. The argument is also that he/she may not have dependents at the age of 70 and expenses will not be as high, compared when he/she are younger.
The third insurance to consider will be a life insurance, which is to cover for death or total permanent disability. This insurance is helpful if he/she has dependents and he/she needs to make sure that the dependents are financially taken care of in the event of his/her demise. Again, the coverage value is dependent on how much the dependents need until they are financially independent themselves. Term life plans are more affordable than whole life plans. There are quite a few insurers which offer term life plans up to a coverage of $1 mil with affordable premiums in Singapore.
The fourth insurance to consider is a personal accident plan. These are usually offered as a rider to term life plans and are quite affordable.
The fifth plan to consider is a disability or illness income plan. This plan gives a monthly payout if the insured cannot work due to disability or illness. The premiums are usually higher and one needs to look at the language of the insurance coverage closely as it may differ from one insurer to the next.
The above are the key insurances to consider and in the order of priority. There are other insurances like universal life insurance (which insurers sell as a legacy planning tool) and investment linked policies (ILP).
We have strong opinions against ILPs and we will cover this in another blog post. Trio Retirement Plan is clear. Insurance is meant to protect and we will like to draw a clear line between insurance and investments.
We will also contribute another blog post on whole life versus term insurance. We are neutral to either. Key consideration is affordability and coverage sufficiency.
TRI-O RETIREMENT PLAN is a simple way to help you get started on your retirement planning. Learn the FUNDAMENTALS and HOW TO GET STARTED. There is also a spreadsheet to help you CALCULATE your monthly savings and your project monthly income at retirement. You can check out our BLOGS on topics pertaining to retirement planning. Feel free to CONTACT US if you have any questions or comments.