The MoneySmart Information to Retirement Half 2: Insurance Protection
So you've made it through the Singaporean education system and now you have a job that pays you a decent salary. You save and even invest for financial goals like retirement.
You're on the right track, but if you're not doing anything to protect your hard-earned cash, it's like putting all of your gold in a vault but forgetting to lock the door. Or, put all of your eggs in one basket, then drop the basket from the top floor of an HDB block.
In this 4-part series, created in collaboration with CNA, we walk you through some of the basic principles of retirement planning. Today's rate is insurance to help protect your assets in the event of a disaster.
Unexpected events can wipe out your savings
It is much easier to lose money than it is to make it. Think about how long it will take you to collect a six-figure sum. Well, a single stay in the hospital can ruin it overnight.
Insurance protects you from this. For example, if you have insurance that covers your medical bills, you don't have to worry about your savings being decimated if you injure yourself or get sick.
Insurance is an expense as you have to pay premiums to the insurer to continue enjoying protection. However, this is an expense that you should not skimp on as it may save you from major financial losses in the future.
The insurance mix you need at a young age does not stay the same all your life.
For example, if you are in your working years and support a household, health and major illness insurance can protect you from financial losses related to illness.
However, the premiums rise with age, which can lead you to reconsider the profitability of certain types of insurance. Conversely, some insurances such as long-term care or occupational disability insurance can become more relevant with age.
I'm not going to go through every single policy you could possibly buy in this article, but know that your needs can vary depending on your family, financial situation, income, budget and age.
Hospital insurance, which covers the cost of medical treatment during a hospital stay, is one of the most important insurances in Singapore. If you don't have other insurance, this is the first type of plan to consider.
Singapore citizens and permanent residents are already covered by a very simple form of health insurance called MediShield Life. However, MediShield Life is intended for use in B2 / C wards in public hospitals, so the upper limits for entitlement are relatively low. All remaining amounts must be paid in cash or from your MediSave account, which in turn is subject to a withdrawal limit.
In other words, if you end up in the hospital and only have MediShield Life, good luck.
To supplement their MediShield Life protection, insurers have developed the so-called Integrated Shield Plan (IP). This is one of the cheapest forms of hospital insurance in Singapore as it doesn't have to replicate your existing MediShield Life coverage.
Like wrinkles and white hair, IP premiums increase with age. While you may be able to afford the most expensive riders as a youth, you may struggle to keep up with your age.
For example, NTUC Income's Enhanced IncomeShield Preferred plan annual premium is $ 255 if you are 21-30 years old. This increases to $ 1,592 if you're in the 61-65 age group and $ 3,113 if you're between the ages of 71 and 73.
One way to keep your premiums manageable in old age without losing protection overall is to reduce your protection to cover a lower station tier, which can usually be done by reducing your drivers or downgrading to a lower tariff.
CareShield Life is another government program that you are unknowingly covered by. This long-term care insurance offers a monthly payment for severe disabilities.
For those born in 1980 or later and over 30 years of age, you are already covered by CareShield Life. If you are young enough not to remember life without the internet, you will be accepted into the program at 30. For everyone else, participation is optional from the end of 2021.
CareShield Life offers you monthly payouts starting at $ 600 if you are unable to perform at least three of the following Daily Living Activities (ADLs) unassisted: washing, dressing, feeding, using the toilet, mobility, and transferring.
As you can see, you have to be in pretty bad shape before you qualify for CareShield Life payouts. As a result, private insurers have introduced CareShield Life supplements that can increase your payout amounts and make it easier to qualify for them.
CareShield Life supplement premiums increase as you age, but you can get a lower premium by signing up earlier.
For example, to receive a monthly disability pay of $ 1,200, a 30-year-old woman would pay $ 337.40 per year for NTUC Income's Care Secure CareShield Life supplement, but a 40-year-old would pay $ 735.40 Pay dollars. In both cases, the premiums would be due up to the age of 67 and protection would continue for the remainder of the customer's life.
To make matters even more complicated, most insurers limit the age at which you can sign up for their CareShield Life supplements to a specific range, usually from the age of 30 to 40 to 60 +.
If you enroll at an earlier age, you tend to reduce not only your annual premiums, but also the total amount you pay over the entire premium payment period. So you can save some money by signing up once you hit 30 to get a lower reward.
Scenario: what happens if you are not insured?
Take the example of Uncle Tan, who reaches retirement age without insurance.
One day Uncle Tan is diagnosed with prostate cancer. Because he cannot afford long queues at this stage of his illness and wants to choose a highly recommended doctor with the best chance of survival, he opts for a private clinic.
Based on MOH historical billing amounts, the average bill for a patient undergoing removal of the entire prostate and surrounding area is $ 56,119. The bill includes surgeon, anesthesiologist, and facility fees, but excludes any up-front costs such as scans and diagnostics. All of that would have to come from Uncle Tan's MediSave and cash savings.
If Uncle Tan had a hospital stay insurance in the form of an IP, which covers the stay on ward A in private hospitals, he would only have had to pay a deductible and a co-insurance, the insurer would have covered the rest.
With a $ 3,500 deductible and a 10% deductible, he would have paid a total of $ 8,791.90 for that particular hospital bill, excluding his other expenses incurred in diagnosing the condition.
Additionally, if Uncle Tan had chosen to buy a driver and cut his co-insurance to a total of $ 3,000, he would have paid a total of only $ 3,000 to cover not only his hospital bill, but other related medical expenses prior to surgery cover.
How to balance coverage and costs
While no one should be walking around with insurance, don't go overboard or insure yourself. In other words, you don't want to spend all or even most of your hard-earned cash on insurance.
Financial advisers recommend spending 3% to 10% of your deductible (after deducting CPF) on coverage, excluding investment-type insurance or other types of insurance designed to help you build wealth.
But really, it's very personal. If you are a high earner, spend very little, and have no children to inherit your wealth, you probably don't even need to spend 3% of your income on insurance premiums.
In addition to taking the time to determine your actual insurance needs, you should also consider how your needs change over time.
When you retire, you may no longer need certain types of insurance or you may want to downgrade certain policies. For example, if you only get life insurance to ensure that your children and elderly parents continue to receive financial support if something happens to you, after a certain age (assuming your children are not getting old in Hikikomoris) you will no longer need it.
Another possibility of not burdening yourself with excessive insurance premiums in old age is to opt for policies with limited remuneration whenever possible. They collect premiums from you over a set number of years, after which you can sit back and enjoy your protection without paying any further. This model is common with life insurance plans as well as CareShield Life supplements.
At the end of the day, insurance is there to protect your finances. But if you overdo it, you might find yourself like this kid who barely sleeps because they have 20 hours of classes a week – in a worse position overall.
In other words, insurance coverage is important, but not so important that you should be spending all of your money on it. So it pays to slowly determine your exact insurance needs and buy exactly the protection you need and nothing more.
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