Part 5. Commentary of Various Type of Insurance
1. Private H&S Shield Insurance
This is the most important insurance to get. What this insurance covers is the medical bills associated with long-term hospitalizations and some (not all) outpatient treatment associated with certain cancer, dialysis and kidney failure. Everyone should get an "as charged" shield plan as opposed to the older type of shield plans that have various capped limits. Luckily, all of the capped limit shield plans have been removed from the market (if I am not wrong), so less confusion for a newcomer. For most "as charged" shield plan on the market, this insurance policy allow you to claim up to 90% of your medical bills. Such plans usually come in 3 flavors targeted for various hospital types - Private, Ward A and Ward B1. (Note: Basic Medishield only covers up to Ward B2). The premium are extremely cheap compared to the hospital bills that one can rack up. Since everyone will go to the hospital eventually (unless you are really that healthy), this kind of insurance is more or less confirmed to "earn" in one's lifetime, in the sense that the premium you pay over the many years can be "claimed back" by just one expensive hospital trip.
2. Co-Insurance Riders for Private H&S Shield Insurance
In a traditional private H&S shield plan, the insurance company will not cover the first $1000-4000 of your hospital bill and will not cover 10% of the bill beyond the first $1000-4000. This 10% that consumers need to co-pay is known as co-insurance. Some riders to such shield plans will pay for the 10%, which means that you will only need to pay $1000-4000 per year, regardless of how expensive your hospitalization costs are. Personally, I find such riders very good value-for-money since they aren't that expensive. Also, I can be sure of how much money I need to budget for hospitalization in the future. With increasing medical costs (average medical inflation is at 5% over the last decade), it might be prudent to get such a rider. In 20-30 years time, it may be likely that even a government hospital will charge six figure sum and 10% of a $100k bill is $10,000. Getting a rider to cover the co-insurance makes one's medical bill more predictable.
3. First Dollar Riders for Private H&S Shield Insurance
Some private H&S shield plan offer a rider than will pay everything. This means essentially you pay zero dollars when you go to the hospital. Sounds great right? Well... not really because such riders are very expensive and became insanely expensive when you reach an old age. I don't find such riders value-for-money, cause the premiums are too high. Insurance is meant to insure against big catastrophic events. I'm sure most people can set aside a few thousand dollars for medical bills right (assuming you have a co-insurance rider)?
4. Disability Income Insurance (Own Occupation, Long-Term)
Disability Income Insurance is probably the 2nd most important insurance for young people. When you apply for this insurance you will declare your salary and your occupation. If you pass the medical underwriting, such DI insurance will provide you with a payout of 60-70% of your last declared salary until retirement age (varies from 50-65), if you suffer from a medical condition that specifically prevents you from working in your original job. For e.g. you are a teacher and you lose your voice permanently, DI insurance payout will kick in. There are only 2 such products on the market - Aviva IdealIncome and GE PaySecure. When looking for such DI insurance be careful that there are alot of "imitation" products out there. Always make sure that the DI insurance you pay uses "own occupation" definition of disability. Note there is also disability defined as "any occupation" and the more traditional definition of cannot perform 3 out of 6 activities of daily living. If any DI plan uses such definitions it is not good, because claiming becomes extremely hard and unlikely. Also, make sure the payout is long-term and not limited to a few years only. DI insurance are cheap and extremely value-for-money considering that the insurance company may need to pay millions if you kenna such a medical condition early in life.
(Note: In the initial post I said the DI payout was for life. My apologies, DI insurance policy only payout until retirement age, which varies from 50-65 depending on how you want to customize your plan).
5. Critical Illness Insurance
Critical Illness insurance pays out a lump sum of money whenever you get one of the 30 CIs as defined in the policy (e.g. stroke, end-stage cancer, coma, etc.) Most of the CIs have very high medical treatment costs associated with them. But also note that the definitions of CI is exact so not every serious or expensive medical condition is claimable as a critical illness. CI may come as standalone CI plan or come as a rider for a term life insurance plan. I have a personal preference for standalone CI, since the premiums are usually cheaper than a term life plan with CI rider. Standalone CI plans are also good for people who need CI protection but don't need the death payout. This is especially true for people who have no dependents. There are some who will suggest that CI insurance is not necessary since if one gets a CI it is likely that the person will die very soon. This is partially true, usually the odds of surviving a CI for more than year is not good (50:50 chance?). Nevertheless, the lump sum of money will help your family members pay for your hospital bills, and should you survive a CI this is where CI insurance is very helpful. Without CI insurance, it is likely that a lot of money would have been spent on hospital bills (especially if you don't have a good shield plan). This can jeopardize you retirement plans in the future.
6. New Generation Critical Illness Insurance
Recently a series of "new generation" CI plans have been emerging. Some features of such plans include: (i) payout for multiple CI (i.e. can claim more than one time), (ii) early payout for CI (i.e. can claim part of the sum assured if the CI condition is not serious like early cancer). It sounds nice in principle, but such plans are also usually 2-3X more expensive than the traditional CI plan. Personally, I find these products not value-for-money, but if I were to purchase such a product I would ask the following questions:
(i) Can I make subsequent claims on the same CI condition (for e.g. in the case of relapse)? Logically speaking after suffering and surviving a CI condition, I would think that the chance of a relapse is higher than the chance of getting another unrelated CI condition. If the insurance doesn't give a second payout for the same CI condition, what would be the point?
(ii) Can I make subsequent claims on related CI condition? If you can't claim on related CI conditions, then the usefulness of the insurance is quite limited as apart from a relapse of your original CI condition, getting a related CI condition is more likely to happen.
(iii) What is the waiting time between the first CI claim and subsequent CI claim?
(iv) How much can I claim from early CI payout, and what is the maximum sum for early payout? Once you have this figures, ask yourself if the max early amount is worth the extra premium you pay over a traditional CI plan. Calculate the difference between traditional CI and early payout CI and do a projection of the investment returns. If the invested returns exceed the early payout sum in a short amount of time, it is probably better for you to "self-insure" the early payout CI by getting a traditional CI plan and saving/investing the difference in premium.
Finally, never forget that the chance of surviving a CI beyond one year is not very high (50:50 chance perhaps?) So, always remember that there is a chance that you will die before you can make the 2nd CI claim. If this is the case, then the extra premium paid for such a plan is truly wasted.
7. Term Life Insurance
Term Life insurance is a form of low-cost life insurance that pays out a lump sum of money when you die. It has a limited "coverage period" and once the policy expires you don't get any money back. Many people don't like this idea of not getting anything back, but always bear in mind insurance is meant for protection. If you come across any life insurance that gives you "cash back" at the end of policy if you have made no claim, you can be sure it will be more expensive than a traditional term life plan. Come on... insurance companies are not stupid people you know! Term life insurance is only really necessary under very specific conditions: (i) You have kids and would like to ensure that in the event if you pass away, your kids can grow up in a "financially healthy" environment, (ii) You have a non-working spouse who depends on you for money, and if you pass away it's likely she cannot find a decent income job to support a decent standard of living. Other situations in which term life insurance may be useful may include: (iii) You have just started work and your parents are financially needy, and would like to leave a lump sum of money for them in case you pass away too early. A very common reason that Singaporeans buy life insurance is so that when they pass away their families will get inherit a lot money. However, a lot of Singaporeans also seem to forget that when they pass away, their accumulated savings and investment also gets passed on to their family. In fact, for cases in which a person passes away at the "normal old age", buying too much life insurance is bad because if he had bought less life insurance coverage and invested those insurance premiums in a long-term investment plan, he would have accumulated more money than the life insurance payout.
8. Whole Life Insurance
Whole Life Insurance is like Term Life Insurance but the coverage is for life. However, do check the definition of "for life" as some companies define it as up to age 99 whereas others define as until you die. Whole Life Insurance can be 2-5X more expensive than Term Life Insurance. Why? Because when stripped down to its bare components a Whole Life Insurance is a combination of a Term Life Insurance (that expires when you die) and a separate Investment Plan. As I mentioned in the earlier part of BTIR, it is often better to Buy Term Life insurance and invest in the difference in premium. Over the long term, you and your family will get much more money than a traditional Whole Life insurance.
9. Limited Premium Paying Whole Life Insurance
In traditional Whole Life Insurance you pay premium up to 65. In the last few years a new type of Whole Life Insurance has emerged. This new variant limits the premium paying period to a fixed time (usually from 5-20 years). The sales pitch is that you only pay premium for a limited time, but the coverage is for life. However, what many fail to mention is that it is also much more expensive than traditional whole life plans. Nevertheless, such Limited Premium Paying Whole Life plans may be useful for young people with exceptionally high starting salaries. Another reason where I think it might be a good deal is for a newborn. The premium for such plans for a newborn would be cheaper, but the insurance has a liability for the lifetime of that newborn. If you do buy for your newborn, be sure to get a CI rider since it will benefit him eventually. However, when compared to BTIR, such wholelife plans in my opinion are also inferior. Still, there are not as bad as traditional wholelife because you can control the premium paying period.
10. Personal Accident Insurance
Personal Accident Insurance provides you with a lump sum payout when you die in an accident (obvious right?). Many PA plans also pay out when you are unable to work in your original job due to medical reasons. Some might sell it as a Disability Income insurance but note that the PA payout for such cases are usually limited to 5 years max. Personally, I don't see much of a use of a PA insurance. If you already have a proper DI insurance and Term/CI insurance it should be good enough. But... if you have extra money why not?
11. Regular Premium Endowment
Regular premium endowment is often marketed as a saving or investment plan with protection features. Be it for protection or savings/investment, such products are definitely inferior to the traditional BTIR strategy. When taken apart to its basic components, a regular premium endowment is like a combination of a term life insurance and a separate Investment Plan. If this sounds like a traditional Wholelife insurance... yes both products are in fact similar. The only difference is that regular premium endowment will pay a guaranteed sum after the policy ends. Most regular premium endowment are long-term commitments, but only offer 1-2% guaranteed returns which is ridiculously bad. Some endowments guaranteed returns are less than the premium paid, and these are worst products since there is a chance that you can lose money! As a rule for a balanced investor here's the expected returns for various time periods: (i) 5YR: 2%, (ii) 10YR: 4%, (iii) 20YR: 6%. Unless the regular premium endowment can make the above specified guaranteed returns, it is usually a better idea to just save and invest via normal investment instruments like unit trust and ETFs. As for protection/insurance concerns, just get a Term Life plan.
12. Investment-Linked Policy Insurance
Investment-Linked Policy products are probably the worst type of products offered by insurance companies (and incidentally these generate quite a lot of commission for the agent selling it). ILP come in many variations, but the most common ILP when broken into its basic part is a combination of a Yearly Renewable Term Life Insurance and an Investment Plan invested in Unit Trust of the consumer choice. Note that I have said "Yearly Renewable", which means that the premium increases every year as you age even if you have developed no health conditions. With regards to the protection/insurance part, the costs escalates exponentially as you age. A very common scenario in ILP (and this has been reported on Straits Times before) is that people are unaware of such escalating costs. As they age, the premiums of ILP increase to the point that they cannot afford it. When this happens, many people are "advised" to use their accumulated cash value from the investment plan monies to pay the premium. Eventually, when the ILP terminates many find that there is not much left and it is possible to get close to zero dollars because all the investment plan monies have went to support the increasing ILP premium. Another issue with ILP is that they are extremely not value-for-money due to the high cost and expenses in an ILP plan. It is often (dare I say always) better to BTIR and get a separate term life plan and invest in your own unit trust. Even if you are the type that refuses to BTIR, I would still recommend you to go with either Endowment or Whole Life plan. At least with those plans there is a guaranteed value, whereas for ILP there is none!
13. Long-Term Care Insurance
Long-term care insurance is an insurance policy that pays out a monthly income (from a few years to lifetime depending on the plan) if you cannot fulfill 3 of the 6 activities of daily living (Washing, Dressing, Feeding, Toileting, Transferring and Mobility). The purpose of this insurance is to help the family members of the invalid or the vegetable with the high costs that may come associated with it (e.g. dedicated nurse, any ongoing medical treatments and therapy, etc...). This kind of insurance is very hard to claim as you need to have doctor's certification of being unable to do 3 of the 6 activities of daily living, and the definitions is very strict and specific. Eldershield is actually a very basic form of long-term care insurance, but its main drawback is that the payout period is too short and the amount too little. Many insurance companies have offered "eldershield supplement" policies that increases the payout amount and pays for life (so as long as the person remains a vegetable or an invalid). However, one consideration to note is that once a person becomes a vegetable or invalid, he/she is unlikely to live very long (at most 10 years?), so a lifetime payout policy may not be too cost effective. Finally, do not overbuy into these type of insurance and don't forget that a vegetable and invalid is unlikely to need money to spend on holidays, hobbies, entertainment, transport, handphone, etc... so a significant proportion of the money that a person usually spends can and should be redirected to support the cost of supporting the ongoing medical fees. I'm quite neutral over this type of insurance. I won't place it on a high priority list, but it's good to have if you have money to spare.
14. Single-Premium Annuity
Many years ago there used to be several annuity products on the market. Unfortunately most of them have been withdrawn from the market with the introduction of CPF LIFE. A single premium annuity is financial contract in which you pay the company a lump sum of money, in exchange for a regular payout for life. Annuity can be deferred (I put my money in now and the payout starts 10 years from now) or immediate (I put my money in now and the payout starts next month). CPF LIFE is an example of a deferred annuity. Annuity are also classified into participating and non-participating annuity. Participating means that the policy can earn bonus over the years (like life insurance) and the payouts have a chance to increase over time. Non-participating means that the payout is fixed for life but usually start at a higher payout value than participating products. Personally, I find investing a portion of one's money in annuity when one is close to retirement a good idea. Because the insurance company is contractually obliged to pay you for life, there is no risk of "out-living" your money. However, always remember that the guarantee is only as good as the person promising it. If the insurance company goes bust, it might be that your annuity payout will be reduced or lost completely. For this reason, I would never commit all of my money to a single annuity plan. Finally always get an annuity that pays out for life. There are some annuity-like products that only guarantee payout for the first 20 years, which kinds of defeats the purpose of having an annuity in the first place!
15. CPF LIFE
Yeah, CPF LIFE is a compulsory annuity product that everyone has to take (unless you too old and managed to escape it). I would just like to state a warning about CPF LIFE - There is no guaranteed payout in the CPF LIFE scheme. This means that the payout can decrease based on <insert whatever lame excuse> or in the worst case the payout can drop to zero! Sounds impossible? Well... as long as it is not in the contract it is a possibility, and when it comes to financial products the only things that matter is the contract. Of course to be fair, I must also mention that CPF LIFE payout can also increase. So you decide which is more likely to happen. Now you might ask what is the purpose of telling me this since CPF LIFE is compulsory anyway. Well... one can always purchase a single premium annuity before reaching 55 and thus split the CPF monies between a commercial annuity (that has guaranteed payout) and CPF LIFE. Something to think about...
