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Wednesday, 5 March 2008

Good and Honest Personal Insurance Advice

1. How much life insurance do I need?

It depends on your personal circumstances. If you have dependents, you should aim to insure for 5 to 10 years of your earnings. If you have accumulated savings, the insurance cover can be reduced by this amount.

For example, if you earn $40,000 a year, you should have life insurance for $200,000 to $400,000. If you have accumulated savings of $50,000, this can be reduced from the amount of your insurance.

As a minimum, you should insure for 5 years of earning. If you are able to afford it, you can increase your coverage to 10 years of earning.

The sum assured is payable on death and permanent total disability.

2. What type of life insurance should I buy?

You should buy decreasing term insurance that covers you up to your retirement age, say 65 years.

If you are now 35 years old, you can buy a decreasing term insurance to cover you for 30 years.

If your sum assured is $300,000, you will be covered for $300,000 during the first year. The sum assured will reduce by $10,000 for each subsequent year, until it disappears completely at the end of 30 years.

The reduction in the sum assured each year will be offset by your savings for the year. As your savings grows, you need less coverage for your life insurance.

The premium that you pay for decreasing term insurance is about 50% of the cost of level term insurance. It is about 20% of the cost of a whole life insurance.

By paying a lower premium for your decreasing term insurance, you have more money to save in a low cost investment fund to earn a higher return for your future needs.

3. Do I need medical insurance?

If your employer covers your medical expenses, you do not need any personal medical insurance.

If you wish to buy a personal insurance now, so that you are assured of continuing coverage after your retire from work, you should choose a low cost Medishield plan provided by the Central Provident Fund.

There are many Shield plans in the market. They cover different classes of wards in restructured and private hospitals.

In selecting your plan, you should consider the total lifetime cost. You should add the premium for the various ages from now until you reach age 85 years. As the premium rate increases with age, you must take the higher cost into account, when you select your plan.

There is no need for you to buy an expensive plan, unless you have a high income. If you enter into a subsidised ward, your medical expenses will be quite affordable and can be covered by Medishield or a lower priced private Shield plan.

Do not spend too much premium on your Shield plan when you are young. You need the savings to cover your insurance premium and medical expenses when you grow old.

The Shield plan has a Deductible and a co-insurance portion, which have to be paid by you. Some insurance company offer a rider to cover these items. As the amounts are not large, you do not need to buy the rider. You can pay them from your Medisave account.

4. How much should I spend on insurance?

You should spend not more than 2% of your earnings on the life and medical insurance on your life. If you include your family, you should spend not more than 3% of your earnings.

By spending less on insurance, you can set aside more savings for your retirement. This should be 10% to 15% of your earnings.

5. Do I need to insure against critical illness?

There is no need to buy insurance to cover critical illness. Your Medishield or private Shield plan can cover most of the medical expenses.

The chance of making a critical illness claim is small. Less than 5% of people make this claim during their working life.

If you wish to have insurance to provide a cash payment, a sum of $50,000 should be adequate. The cost of critical illness cover is high. You should not spend too much premium on this risk, as the return is poor.

6. Do I need insurance for the whole of life?

You need insurance to take care of your dependents, if you are the breadwinner. If premature death or permanent disability occurs, the life insurance will pay a cash sum to take care of their future needs.

When you retire from work, there is no loss of future earnings. You do not need life insurance to cover this risk, as there is no financial loss.

You are likely to have accumulated sufficient savings to take care of yourself and your spouse.

You need insurance only to provide for the financial needs of your dependents. If you retire from work, your children are likely to be grown up and able to take care of their own financial needs.

There is no need for life insurance beyond age 65.

7. Why does the insurance adviser recommend a few insurance plans that take up more than 10% of my earnings?

These insurance plans provide a combination of protection and savings and give you a return on your insurance premiums.

The insurance adviser earns a commission based on the amount of premium that you pay. They wish to sell you as much insurance as possible, so that they can earn more commission.

It is better for you to buy decreasing term insurance and to invest your savings in a low cost investment fund. You can get a higher return by separating the insurance from your investment.

8. Sample Premium Rates

Whole life – covers death and permanent disability for a lifetime

Living – covers death, permanent disability and critical illness for a lifetime

Term – covers death and permanent disability during the selected term

Decreasing term – like term insurance, but sum assured reduces each year

Living benefit – covers death, permanent disability and critical illness during the selected term.

Monthly premium for $50,000 sum assured

Male
Age
20
25
30
35
Whole life $62.00 $71.50 $84.00 $99.50
Living $76.00 $89.50 $106.50 $129.00
20 yrs term $6.10 $6.60 $7.95 $10.70
20 yrs decreasing term $4.60 $4.70 $5.30 $6.95
20 yrs living benefit $8.85 $11.30 $16.20 $24.70

Female
Age
20
25
30
35
Whole life $57.00 $65.50 $76.50 $89.50
Living $69.50 $81.00 $96.00 $115.00
20 yrs term $4.75 $5.35 $6.45 $8.25
20 yrs decreasing term $3.85 $3.95 $4.35 $5.45
20 yrs living benefit $8.40 $10.45 $15.05 $23.85

Monthly premium for $100,000 sum assured

Male
Age
20
25
30
35
Protection $121.50 $140.50 $165.50 $196.50
Living $149.50 $176.50 $210.50 $255.50
20 yrs term $9.70 $10.70 $13.40 $18.90
20 yrs decreasing term $6.70 $6.90 $8.10 $11.40
20 yrs living benefit $15.20 $20.10 $29.90 $46.90

Female
Age
20
25
30
35
Protection $111.50 $128.50 $150.50 $176.50
Living $136.50 $159.50 $189.50 $227.50
20 yrs term $7.00 $8.20 $10.40 $14.00
20 yrs decreasing term $5.20 $5.40 $6.20 $8.40
20 yrs living benefit $14.30 $18.40 $27.60 $45.20

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