From an insurance planner point of view, we always start from the worst case scenarios. The biggest risks are usually the ones that can happen the earliest and the most expensive (such as being totally paralysed tomorrow), to the most valuable individual (such as a father who solely earns for the family). Here are some of the encounters I’d like to share with you in this episode:
Parents buying education plan for their children, but neglecting a Whole-Life plan for themselves
The idea here is to insure the income generating machine first, which is usually the parents. The need to pay for University 20 year down the road may not matter much when a breadwinner lost the ability to bring income to the family due to death or major disability tomorrow. A Whole-Life that covers death, disability & major illnesses is one of the plans that a breadwinner should be looking at first.
Buying a policy that pays on death, but neglecting CI and TPD
The worse case scenario is the sole breadwinner lost the ability to bring income to the family due to a major illness. Unless there’s ample savings in the bank, the rest of the family is going to face some rough times picking up the bills they are not used to paying. The former breadwinner is now a depending on his/her dependants for sustenance. The Critical Illness and Total Permanent Disability benefits are designed to minimize such loss of family income.
Buying MediShield plan without the optional riders
The main put off here is the premium. You can’t use your CPF Medisave to pay for the missing features of your private MediShield plan. These usually neglected features of the MediShield plan that makes “claiming from the 1st dollar” possible. Otherwise, you’re probably looking at getting back at 60% to 70% of your bill. According to Aviva’ medical claim history, a 19-days hospitalisation claim for Lymphoma has amounted to $440,000! Can you afford 10% ($44,000) of that bill with your Medisave? It is probably a smarter move to pay a few dollars every month for someone else to foot the rest of the bill!
Buying accident plans & medical plans, but neglecting WL & Retirement plans.
Accident & Medical plans pays for your medical bill, but it doesn’t pay for loss of income. Besides, but if you live a full-life without incidents, you’re not going to get anything back. Aside from having a fully-paid house and a certain payouts from CPF (if any), there’s not going to be a huge pot of cash at the end of the rainbow unless you look into insurance plans with savings element.
Putting all savings budget on insurance policies, but not having contingency funds of at least 6 months of salary
Having enough cash in banks means it buys you time to when life brings some nasty surprises. From a broken fridge or washer that need to be replaced immediately, to a job retrenchment event that leads to zero income. Much like an insurance, does it? Reality check, the only insurance you got for this is your own “piggy bank”.
One of the common reasons why people buy an endowment plan (savings plan) is because it “forces” them to save. Once the GIRO payment is in place, savings become automatic. Most plans will stay in-force.. until a pay cut shakes them up and suddenly budget becomes an issue. It is not uncommon for policy owners terminating their policies prematurely, and grudgingly accept a big loss on their savings (Read: Why you shouldn’t withdraw from your policy until the very end). Some policies don’t give you back all your money until the very end. The best rule of thumb is to have at least 6 months’ salary savings in your bank account so that you don’t have to dip into your long term savings when you lose your job or adjusting to a pay cut. The alternative here is to borrow from someone else. Good luck in getting interest-free loans!
To be continued…
