Personal Financial Planning – Insurance
Insurance is the most shared risk move technique in risk management.
There are 3 layers of insurance protection.
Firstly, the social inner, provided by national schemes. For Singapore, it will be the insurance from CPF like DPS, HPS, Medishield, Eldershild, CPF Life. They are usually the most basic required and premiums are most affordable. Secondly, the group inner. This is coverage provided by employers, unions or associations. Their premiums are also comparatively affordable. However, they will no longer cover when leaving the organization and there is usually a age limit, resulting in a drop in coverage when it is most needed. Thirdly, the individual inner. This is purchased from insurers at the personal level to supplement the first two layers. Enhancing the coverage in scope and thoroughness.
Classes of insurance:
– Life Insurance
– Investment-connected Policy (ILP)
– Health Insurance
– Personal General Insurance
The 3 main types of traditional life insurance are term, whole life and endowments. The most basic term policy is the Dependent Protection Scheme (DPS) by CPF. The premiums are the lowest in Singapore and can be paid by CPF OA. However, the limitation is that coverage is up to $46,000 and age 60. Another decreasing term policy by CPF is the Home Protection Scheme (HPS). A compulsory mortgage insurance for those using CPF to buy their similarities.
Investment-connected Policy (ILP)
ILPs are mainly yearly replaceable term insurance coupled with investment in unit trusts and the addition of more charges. They are unprotected to a different set of rulings, do not need trustees and fund selection is restricted to those within the insurer umbrella of funds. One advantage is the charges are transparent. However, they are numerous, monotonous to compute and allows so much variation that it aims to confuse. They include:
(1) Initial sales charge – This is a one off charge factored into the bid-offer spread of the fund. Usually about 3 to 5% of the investment amount.
(2) Fund management fee – This is paid to the fund manager in spite of of the performance of the fund. Usually 0.5 to 2% per annum and it is priced into (deducted from) the unit price.
(3) assistance charge – The insurance coverage premium including all the riders are funded by deducting units. The premium is usually increasing based on the new age band.
(4) Policy fees – A flat monthly fee is charged in spite of of the premium amount, to cover administrative expenses.
(5) Administrative charges – Additional fees paid for record keeping, transaction sets, bank sets, trustee sets, and miscellaneous fees. Usually about 0.2 to 0.4% per annum and it is priced in in addition.
(6) Fund switching charges – This will be charged when changing investment funds. Usually free for one switch per year.
(7) Premium holiday charges – This will be charged when the premium holiday characterize is activated.
(8) Surrender charges – Charges imposed when surrendering the policy.
(9) Allocation – Amount of premiums used to buy units is usually not 100% for the initial years. Example: 20% for 1st year; 40% for 2nd year; 60% for 3rd year; 80% for 4th year; before finally 100% from 5th year onwards.
Suitability of ILPs will be for those who have sufficient insurance cover and have excess budget which they would like to use to sustain their agents instead of investing in unit trusts directly.
(1) MediShield and private protect plans
MediShield is the social insurance that provides the most basic cover. The disadvantages are that it has many sub limits for each of the covered expenses, expires at age 85 and provides coverage mainly for class B2/C wards. It is also unprotected to deductibles and co-insurance. It is paid by MediSave. Some employers may provide the second inner of cover. However, this cover will end when leaving the employer. Medical coverage is most needed in retirement, as a consequence, taking up a plan then will be unprotected to strict underwriting conditions (i.e. it will not be accepted or existing medical conditions will be excluded). The private protect plans allow coverage beyond age 85, but it needs to be taken before age 75. It usually does not have sub limits as it is “As Charged” coverage. Some insurers already cover the deductibles and co-insurance if a rider is purchased on top of the basic plan. The MOH website provides a comprehensive comparison of all the obtainable private protect plans. The plan is most appropriate for covering medical and current treatments. With rising medical cost, this insurance is most necessary to avoid cost being an issue to seek the proper medical treatment.
(2) basic illness
It provides a lump sum assistance if the insured is diagnosed to be experiencing from one of the 30 chosen illness or surgical procedure. The 30 illness are chosen from a list of illnesses by the Life Insurance Association of Singapore (LIA). Their definitions have all been uniform by the LIA. The 2 types of coverage are the speeding up and additional. The speeding up coverage shares the sum assured with the death/TPD assistance. The additional coverage is a separate cover on top of the basic sum assured, hence it can be higher than the basic sum. Variations include being issued as a stand-alone policy or a rider, having an early payout for the initial stages of the illness, and providing specific coverage for only one illness like cancer. It is most appropriate to provide for treatment cost that may not be included in the HealthShield like expensive overseas or different/experimental treatment in addition as additional care giving expenses incurred when basic illness is diagnosed.
(3) Disability income
It provides monthly income in the event the insured is unable to work as a consequence of an accident or illness.
The definition of disability varies in that the inability to work is confined to the insured’s own occupation, similar occupation or any occupation. It is most appropriate to protect against the loss of income so as to continue the living expenses in the event of disability and differs from TPD in that the definition is less stringent.
(4) Hospital cash
It provides a daily cash assistance for each day of hospitalization. It is usually limited to a stated number of days and a life time limit. It is most appropriate for the self employed who will suffer income loss as a consequence of hospitalization.
(5) ElderShield and private plans
It provides a monthly assistance if the insured is unable to perform 3 out of the 6 activities of daily living (ADLs), namely feeding, bathing, toileting, dressing, mobility and transferring. ElderShield is the most basic level of coverage, providing $300 or $400 monthly for 60 or 72 months. It can be paid with MediSave. The private plans enhances these plans to provide higher benefits and longer duration of payout. It can be paid with MediSave up to a limit. It is most appropriate to cover disability for those aged 40 and above. TPD coverage usually ends at age 60/65, but this provides life time coverage. And it is usually limited payment of premiums.
Personal General Insurance
(1) Packaged household
It provides coverage for the building and contents.
It is usually compulsory when a person takes up a housing loan.
(2) Valuable articles
It provides coverage for items with high monetary value like antiques, fine arts, etc.
It can be an itemized or blanket coverage.
It is usually for those who keep valuable items in their homes like art or antique collectors.
(3) Personal accident
It provides coverage for bodily injury caused by solely, directly, independent, external, violent and visible method.
It is most appropriate for those with a budget restriction or are involved in blue collar work or are not able to acquire any of the traditional insurance due to medical underwriting restrictions.
It is a compulsory insurance obtainable as 3 types: Third party, Third party fire and theft (TPFT) and Comprehensive. Premiums will vary between insurers depending on the make, form, age of the car, driver’s age, occupation, experience. observe the amount of excess applicable and it is advisable to buy NCD protection if NCD has accumulated to 50%.
Based on the risk management plan, those low frequency, high severity areas should be covered with the appropriate insurance. As insurance coverage and premiums vary between insurers, it will be prudent to get quotes from as many as possible. Insurance is usually a life long commitment, it will be wise to ensure the most value and appropriate one is taken up.