Personal Finance

My personal take on what insurance to buy

When deciding what insurance to buy, we often depend on the recommendations of financial advisors. However, doing so has its perils as the premiums can start to rake up without our knowledge. I realised this when I paid around $14k in insurance premiums in 2019.

Yes, you read that right, I paid a 5 digit sum to insurance companies. To put that into context, it was close to 33% of my annual net salary. This perhaps explains how I became a VIP client of one insurance company?.

How did my premiums skyrocketed to such an amount? Well, here is a rough breakdown of my then insurance portfolio:

  • Whole Life coverage: 325k ($3400)
  • Term Life coverage: 500k ($250)
  • Personal Accident coverage: 500k ($750)
  • Critical Illness coverage (including under life insurance): 675k ($200)
  • Medical/Hospitalisation+rider: ($980 excluding medisave)
  • Two Endowment Plans: ($6800)
  • Investment-Linked Insurance: ($1700)
  • Total premiums: $14,080

After looking at the premiums paid, I thought to myself “Holy C***…that is a lot of money I am effectively ‘giving’ away”. This prompted me to review my insurance portfolio to see how I could better optimise it and of course, pay less in the process.

As such, in this post, I will be sharing my thought process behind what insurance to buy and how I optimised my insurance portfolio.

Before continuing, let me put forth a small disclaimer first…

Disclaimer: I am not a trained insurance agent or financial advisor. What I write in this post is based purely upon the evaluation of my own circumstances and opinions about insurance. It should not be considered as a recommendation to purchase or surrender any insurance plans.
For the insurance agents or financial advisors out there, the intention of my post is not to create conflict or cause unhappiness. Rather, I feel that everyone should be more aware of the insurance products that they purchase. As always, I welcome constructive feedback or criticism in the comments section.

With that out of the way, let’s get into it.

Why even buy insurance

Almost everyone will tell you that insurance is important to buy. But have we stop to think exactly why we are buying insurance?

Knowing our reasons for buying insurance would prevent us from potentially overpaying for extras we might not need.

For myself, buying insurance is like a financial hedge against unexpected life events. Since we can’t possibly predict the future, I wanted to be financially prepared for the potential what-ifs.

As such, any insurance I buy or have should alleviate some of the financial cost of unforeseen events. These can range from unplanned hospitalisation, the onset of critical illness (like cancer, tumour etc), disabilities or even death. The idea was that I did not want to become a financial burden should such events befall me.

Besides covering for health-related expenses, I also explored the option of using insurance to grow my money. As a rule of thumb, I would only look to grow my savings through insurance. This is due to the underwhelming returns of insurance as compared to investing in the market.

Once I knew my reasons for purchasing insurance, I then went on to prioritise which insurance to buy.

Prioritising which insurance to buy

When it comes to prioritising insurance, I ranked them accordingly to the list below:

  • Get these first before anything: Hospitalisation, Disability Income, Critical Illness
  • Good to consider: Term Life Insurance, Personal Accident
  • Luxuries: Endowment Plans, Annuity Plans
  • Avoid at all cost: Whole Life Insurance, Investment-Linked Insurance, Early/Specific Critical Illness

Now, let me explain why I deem my insurance priority as such.

The get this before anything else tier

Needless to say, I consider insurance in this category to be must-haves. Remember how I said insurance should cover for unexpected life events? That is exactly what insurance in this category does.

Medical/Hospitalisation insurance

The basis of having medical insurance is simple, it offsets a portion of our hospitalisation bills.

During such times of unfortunate hospitalisation, the last thing we want is to worry about the potential exorbitant medical bills. Although medical insurance may not fully cover the medical bills, it nevertheless allows us to better focus on recovery and alleviate some financial worries.

Although most of us have basic medical insurance coverage in the form of Medishield Life, it is always prudent to upgrade to private insurance due to certain limitations of Medishield Life.

For instance, the maximum policy limit for Medishield Life is 100k per policy year. This means that you can only offset a maximum of 100k off your hospitalisation bills per year. Any higher and you would have to pay the full amount via cash or Medisave. This pales in comparison to most private medical insurance where the limit per policy year is 1mil.

Furthermore, Medishield Life only covers a portion of the bills for certain surgeries and treatments. Conversely, private medical insurance can often cover the full cost of certain surgeries and treatments.

Given high hospitalisation fees, I thus rank medical insurance as the first insurance that anyone should look to buy.

Disability Income insurance

For most of us, our main income stems from our job. What would happen should we not be able to work due to severe disability? The hard truth is that the very nature of our jobs and income would be in jeopardy.

This is where disability income insurance comes into play. Disability income insurance provides a monthly payout should severe disability befall us. This payout equates to a certain percentage of our monthly salary.

Fortunately for most of us, we will be getting a baseline disability income insurance soon in the form of Careshield Life. Careshield Life provides a monthly payout for as long as the individual is severely disabled. The fact that the Government has made Careshield Life almost mandatory (you can opt-out if you are born in 1979 or earlier), kind of reiterates the importance of disability income insurance.

As such, to mitigate some of the potential financial loss in the event of severe disability, I feel that disability income insurance is crucial for one’s own sustenance, be it during the recovery process or life thereafter.

Critical Illness insurance

As the name might suggest, critical illness insurance covers the individual in the event of critical illness. A lump sum is often paid out upon diagnosis of early, mid and/or severe stage critical illness, depending on the insurance plan.

The importance of critical illness insurance cannot be underestimated given the increased risk of contracting at least one critical illness in our lifetime.

Based on statistics, critical illnesses attributed to around 50% of the principal causes of deaths in Singapore. A study has also shown that compared to a decade ago, more people are suffering from chronic diseases as they age. Given this increasing prevalence of the onset of critical illness, can we really take the chance of not getting appropriate critical illness coverage?

I ranked critical illness insurance as crucial as it gives us a sense of financial preparedness and security on the onset of critical illness. Although the chances of getting most chronic illnesses can be mitigated with lifestyle changes, certain chronic illnesses, such as cancer, can strike us regardless of how healthy we are. Thus, critical illness insurance prepares us in the event of a bad dice roll from fate. It also gives us a financial peace of mind during the recovery process.

With that, it rounds up the types of insurance that are must-haves from my personal perspective. I will move on to the next tier of insurance that I feel are not as crucial, but still important to have nonetheless.

The good to consider tier

Insurance plans in this category are the ones that I would look at after being sufficiently covered for the must-have insurances. At times, these insurance can be deemed as must-haves also, depending on one’s life circumstances.

Term Life insurance

At its core, life insurance pays out when the policy owner passes on. As such, we should mainly be buying life insurance only if we have dependents to cover in the event of our deaths.

Life insurance is normally categorised into two main groups, term or whole life. The main difference between the two is that whole life insurance has cash value upon termination, maturity or payout of the plan. This means that a portion of the premiums paid can be gotten back. Term plan, on the other hand, offers no cash value at all.

Despite the cash value of whole life insurance, I feel that term life insurance offers more value for money due to its substantial coverage with premiums being a fraction of whole life insurance plans. After all, what is the purpose of getting back the premiums paid if we cannot properly cover our dependents in the event of our deaths?

As such, I would defintely recommend term life insurance for anyone with dependants to cover. However, we should still ensure that personally we are adequately covered first before considering term life insurance. This explains the lower priority that I allocate to term life insurance.

Personal Accident insurance

Personal accident insurance pays out in the event of injuries or deaths relating to accidents.

What events to be deemed as ‘accidents’ however, can be very broad and often depends on the respective insurance company. Depending on the seriousness of injuries or nature of the accident, the claimant may receive a fraction of the coverage amount.

When it comes to personal accident insurance, I rank it as a good to consider due to the lower probability of getting into an accident. Furthermore, as the payout is tagged to the seriousness of the injury, it does not make sense to pay high premiums for a low probability event. As such, get a cost effective personal accident insurance which covers the most common injuries.

However, for those working in jobs that expose one to a higher probability of accidents, personal accident insurance can be given a bit more priority. Same goes for those who ride or drive to work daily.

So there it is the two insurance that I deem as ones to consider buying after being properly covered for the first three must-have insurance. When it comes to these insurance, always look at your own circumstances and allocate the premiums to be paid accordingly.

The luxury insurance

Much like luxury brands and products, I deem insurance in this tier as not important to have at all. To be honest, I was thinking if this tier should even exist or would it be better having just the ‘avoid at all cost’ tier.

Then it dawned on me, that some ‘luxury’ insurance can at times be really useful to have. Without further ado, let’s get into the insurance that belongs to this tier.

Endowment plans

As most of you might know, endowment plans lock up our money for a set period of time (often a decade or more when it comes to long term plans). This means that we would not be able to access the cash value of the plan before the pre-fixed number of years, without incurring some form of penalty. It is exactly this restriction of flexibility and freedom which makes me not recommend anyone to purchase long term endowment plans.

For me, savings should always be liquid and readily accessible in case of any emergency. Furthermore, having accessible savings also allows one to capitalise on any opportunities in life. As such endowment plans that ‘lock’ up a portion of my savings is really not ideal given the potential opportunity cost that comes with it.

Having said that, I however do not swore off endowment plans entirely.

The reason is simple, short term endowment plans (in the region of at most 3 years) can be a useful tool to grow our savings.

In a low-interest-rate environment, short term endowment plans can provide higher returns than high yield bank accounts. The important thing to note is that one should only use excess savings that ain’t required in the near future for such endowment plans. If balanced correctly, short-term endowment plans provide a higher return on our savings without sacrificing too much liquidity.

Alternatively, you could also sign up for products such as the Singlife Account which gives 2.5% interest on the first 10k. Since withdrawals can be made without penalties, it sidesteps the drawbacks of owning endowment plans, while providing competitive yield.

Annuity plans

Annuity plans are generally bought to supplement income needs during retirement. With annuity plans, they provide a specific monthly amount which is determined by the premiums paid. Most annuity plans typically payout when the policy owner is in their 50s. However, recent annuity plans allow you to determine at which policy year the payout will start.

Although annuity plans can supplement our retirement needs, I would not recommend most middle-aged adults to get them. The reason once again boils down to opportunity cost.

Given that most annuity plans yield around 2 to 2.5%, there are better low-risk instruments out there to grow my savings. Heck, even contributing to our own personal annuity plan set up by the government (yes, I’m referring to the CPF) provides better returns as compared to private annuity plans.

As such, I will only consider private annuity plans in the following circumstances; When I’m nearing retirement, my CPF SA has reached or surpassed the full retirement sum (FRS), and there are no better alternatives yield wise. Other than that, I would not bother with purchasing private annuity plans.

The avoid at all cost tier

Ahh…we have come to my personal dumpster tier for insurance. In my opinion, everyone is better off not purchasing insurance in this tier. The cost often outweighs the benefits of owning such insurance.

Do not purchase these insurance

Whole life insurance

Earlier in this post, I briefly talked about how whole life insurance provides a portion of premiums paid upon a claim or maturity. With that being said, you might think that getting whole life insurance is better as you are potentially saving your money. As a matter of fact, insurance agents also often tout this saving aspect of whole life insurance. The reality though might not be such.

Truth be told, with whole life insurance plans, you might just be underinsuring yourself. As a comparison to term life insurance, having similar coverage for whole life insurance would cost significantly more, like way more.

Take for example one of my whole life insurance that I had. For a 150k coverage, I was paying an annual premium of 1.7k. In comparison, I’m currently paying at most $700 for a term coverage of 1mil.

Yes, with term insurance, I do not get back my paid premiums paid and coverage also stops at age 65. However, I calculated that the amount saved from having term insurance is too much to ignore. Furthermore, investing the difference in the premium amount would also leave me with more than what I would have if the whole life insurance matures.

At the end of the day, I prioritise the financial security of my dependants should anything untoward happen to me. As such, whole life insurance does not appeal to me at all as I am not able to get the appropriate coverage with a comfortable premium amount.

Investment-linked insurance

When it comes to investment-linked insurance, you are effectively paying someone to invest on your behalf, with no guarantee of a good performance.

Most funds associated with investment-linked insurance typically have a management fee of at least 1%. This means that the policyholder is paying the insurance company regardless of whether the investment generates positive or negative returns.

Thus, buying investment-linked insurance subjects our money to the dual risk of both the general market and the fund managers. Although insurance agents would highlight the stellar performance of the fund, we should be mindful that past performance does not equate to future performance.

Furthermore, premiums are also not fully invested in the first few years of investment-linked insurance. This is due to a portion of the premiums being used for the ‘protection’ part of the insurance. This can potentially lead to a lacklustre investment return as compared to if we had invested by ourselves.

For investments wise, do not always leave it to the professionals. Doing so means you are effectively lowering your investment returns. Always try and learn to do it yourself. At least by doing so, we will be able to learn from our mistakes and become a better investor in the process.

Early/Specific critical illness insurance

Unlike standardised illnesses in typical CI plans, insurance companies have discretion over their definition of early CI. It is for this reason, why there are products which target specific illnesses such as cancer or early-stage chronic illnesses.

It is this very niche nature of such plans that I feel we are all better off without them.

To me, it does not make financial sense to buy a plan that only targets certain illnesses. Although there are early critical illness plans that target the 37 illnesses standardised in typical critical illness plans, they often do not come cheap. Most of us would be better off buying a comprehensive critical illness plan that covers early, intermediate and late-stage critical illnesses.

With that, I have shared my thought process about what insurance to buy and the priority in getting them. I will now move on to the coverage amount.

Determining the coverage amount

As compared to what insurance to buy, determining the coverage amount and till what age is much more subjective. How I determine both are based upon my own personal circumstances and typical financial advice.

Medical insurance coverage

For medical insurance, I currently have the highest coverage possible. This means that my plan covers up to private hospitals. My deductibles and co-insurance also remain covered under the old rider scheme.

Moving forth, I am currently downgrading my medical insurance to exclude being covered in private hospitals. My thinking is that with the ageing population in Singapore, there might be more hospitals built in the future. Even if I’m wrong, I still do not stay that far from a public hospital?.

Although some might argue that the quality of service in government hospitals pale in comparison to private, is it really worth paying much more though? For me personally, I remain on the fence about this.

However, I’m also aware of the fact that medical insurance has its limitations too. This means that it may not necessarily cover 100% of the hospital bill. In such instances, being warded in a public hospital is a more cost-effective approach to me. But of course, I would lose that bit of comfort and luxury.

Critical illness coverage

As a start, most financial advisors would recommend having a CI coverage of around five times your annual income. This provides you time to recover without worrying so much about potential income loss.

As a single working adult, a CI coverage of 300k would be just about right for me. The first 100k to pay for immediate medical expenses, the next 100k for aftercare and the last 100k for me to invest so that I would not need to depend so much on a job for income.

With that in mind, I opted for a multi-pay CI insurance with a 100k coverage till age 85. The good thing about multi-pay CI plans is the multiplier effect on the base CI coverage.

For instance, my plan pays out 300% of the base coverage for severe stage critical illness. It also covers early CI and potential relapses of CI. The downside to it is that it costs significantly more than a traditional CI plan which only covers severe stage CI.

In addition, I only opt for CI coverage until age 85 for one main reason. If I was to get CI after age 85, I think I would be mentally prepared to leave this world. Thus I would just rely on whatever savings I have to fight the illness.

Personal accident coverage

For my personal accident coverage, I went with a 600k coverage till age 70. The coverage is so high not because I need it, but rather because the premium is pretty cheap?. All in I only paid $72 in annual premiums for my personal accident coverage.

If you want a more profound answer for high coverage, I can only think of the payout percentage. As mentioned earlier the payout for personal accident plans depends on the extent of injuries. As such, in the event of a claim, a higher coverage equates to a higher payout.

Also for those looking to buy personal accident plans, consider whether you want a plain tradition plan or one with extra perks such as TCM or chiropractic benefits etc. Of course for a plan with extra bells and whistles, you would definitely need to pay more. For me, I am fine with just a personal accident plan.

Term life coverage

I opt for a term life coverage of 1mil till age 65. There are two main reasons for this.

Firstly, as my parents are in their early 60s, I need to provide around 20 years of their retirement needs. At an estimated 2k a month each for their expenses, the total would amount close to 1mil. For their remaining retirement years thereafter, I expect CPF Life payouts to come into play. As such, if I pass away unexpectedly, my parents should have ample in their retirement years.

Secondly, I only opt for coverage till age 65 as I do not foresee having any more dependants then. While some might extend their coverage to provide a sort of legacy for their kids, I do not see the need for that. The reason is simple, by then, my kids (if I have any) should already be earning some form of income. Furthermore, the value in both my CPF account and investment portfolio should also be substantial by then. Thus, the inheritance amount would definitely be sizable.

So there you have it, my rationale for deciding on the coverage amount for the main insurance plans I have. As you can see, determining how much coverage is enough depends very much on circumstances and perspectives. At the end of the day, plan for coverage with the mindset of making it as watertight as possible in the instance of unforeseen events.

My revamped insurance portfolio

After making all the necessary considerations, my insurance portfolio currently looks like this:

  • Term life coverage: 1mil ($625)
  • Group personal accident coverage: 600k ($72)
  • Disability income coverage (50% of salary): ($96)
  • Critical illness coverage (early till severe): 100k multi-pay up to 600k ($1859)
  • Medical/Hospitalisation coverage+rider: ($385 excluding Medisave)
  • Two Endowment plans: ($6800)
  • Total premiums: $9837

Although the annual premium is still a pretty high amount, I’m glad that I was able to reduce around 4k in total premiums. Furthermore, I also felt that I became better insured in the process. The bulk of my premiums continue to be my endowment plans. On the bright side, I would soon stop paying for one of it (4 more years to go!).

Moving forth, this annual premium would also reduce slightly with the downgrading of my medical insurance.

Concluding thoughts

Through my process of optimising my insurance portfolio, there were times when I second-guessed about surrendering some plans. More often than not, it is always due to the fact that I would be making a loss if I surrendered the policy.

However, if I felt that such plans were no longer beneficial to me, I still went ahead and surrendered them. For me, I would rather suffer some short-term pain than let it drag and cause long term damage.

As such, if you are optimising your own insurance, always focus on the long term and be mindful of the intended purpose of having that insurance. If it does not benefit in the long term or there are much better alternatives, do not be held back by the prospect of making a loss on your paid premiums. On the flip side, be happy that you would be able to better invest the premiums that you got back?.

What are some of the problems you face when optimising your own insurance? Or do you completely disagree with my views about insurance? Let me know in the comments! I will be more than happy to discuss them.

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