There is a plethora of online content and resources devoted to insurance planning. But most of these content tend to be complicated, filled with jargons or written against your interest as a buyer.
This definitive guide to insurance mainly elaborates from an objective (i.e. not coming from an agent whom is trying to sell you something) and self-practiced standpoint to help you get started in your planning and review. It is meant for those who are just graduated from college and got a job; a corporate professional who is looking to start a family; a software engineer, product manager. You get the point that insurance is important for everyone.
This is a big topic and hence, the post is lengthy. Bookmark this and re-visit again if you need to.
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Step 1: Know what you have
For those who are fortunate like us, our parents may have already bought insurance policies when we were kids and these should give you a head start. There are also often government or employer policies which include insurances. It is important to identify what corporate insurance benefits you are protected under.
You might be thinking you are starting from ground zero but often, this is not the case. It is best to check what policies you already have. Similar to being lost in a jungle, the best way out is to use what you have and find out where you are on the map before navigating out of the woods. First, check in with your parents, pull out old insurance booklets and tabulate what type of coverages you have.
Step 2: Understand what you need
What is insurance and what should I buy first?
The basis of insurance is to cover unexpected expenses or losses.
There are many variations of insurance categories that you can buy, ranging from life, health, personal accident and more. Out of all these, there are mainly 3 types of insurance policies that you will absolutely need. They are needed because they cover for events that you will 100% suffer from. The 3 types are life, critical illness and hospitalisation policies.
Ordered in terms of priority and their reasons:
- Hospitalisation insurance typically pays for your hospitalisation charges incurred above the capped amount that you have paid for
- Critical illness insurance pays out a lump sum amount or regular payments in the event you suffer an illness specified in the policy
- Term life insurance pays out a lump sum amount in the event of your death. This is an altruistic decision as you buy this insurance for benefit of others. For example, absolving your family’s burden of home mortgage by using your payout from life insurance to pay it off
These 3 should form the foundation of your insurance coverage and you should buy them as soon as you can. Depending on your inclinations, other insurance policy types such personal accidents, disabilities and hospitalisation income can then be added.
How much should I buy?
After picking the insurance category, there are typically 4 elements in insurance which you will need to balance and decide as part of your plan. They are:
- Premium costs: how much you pay for the insurance
- Coverage period: how long you are covered
- Specific type of coverage: what are you covered for
- Amount of coverage: how much you are covered for
Each element will affect the other components, with premiums usually being the balancing element. I will share my strategies for the above 3 policy types to get you started but you can adjust to your preferences.
For hospitalisation plans, the premiums will often differ depending on the coverage amount cap and the type of hospital. Typically, the higher the coverage amount cap, higher the premiums. Treatment at private/non-federal/specialised hospitals also results in higher premiums due to better quality of treatments and its higher costs.
To get a gauge on how much coverage should be, you can use these latest available hospitalisation fee estimates from official sources.
- United States: Average adjusted cost of $14,101 per inpatient stay at community hospitals in 2019 
- Singapore: The average bill of B ward may range from $2,830 – $7,876 while the average surgical bill for a B1 ward ranged from $4,629 – $9,922 
Factoring in medical inflation of >7%, it is safe to assume that hospitalisation costs will keep increasing. Given that you will be buying this policy for the long term, it is best to have some buffer to accommodate for this inflation.
Combining the above information and with my personal experiences of treatment for relapsed cancer of a loved one, a good coverage amount is at least $100,000.
Especially if you are in an accident-prone occupation or industry – pilot, construction worker or logger (top 10 most dangerous jobs), it is important that you also get this coverage.
Critical illness insurance
For critical illness plans, the premiums will often differ depending on the coverage amount cap and the type of illnesses covered. Typically, the higher the coverage amount cap, higher the premiums. More types of illnesses also result in higher premiums.
When you suffer from a critical illness, you should expect to lose your income as treatment and rest becomes the priority. Depending on the severity of illness, the income loss could last for months or years. This insurance is typically used to replace your income and pay for additional hospitalisation charges if it exceeds the policy coverage amount cap. It is prudent to have an average of 2 years of expenses as coverage. A ballpark estimate of $2,000/month of expenses will thus equal to ~$50,000 of coverage.
Term life Insurance
For life insurance, premiums will often differ depending on the coverage amount cap and your age when you bought the coverage. Typically, the higher the coverage amount cap, higher the premiums. The older you are, the higher the premiums as it also means that you have higher chance of mortality compared to average human longevity.
If this is used to cover for home mortgages, it is common to match the period and amount of coverage of a term life insurance to that of the home mortgage loan.
An alternative use is to simply replace the funeral costs and income loss to your family due to your death. Again, using official statistics as a benchmark for funeral costs:
A common ballpark time period for income loss replacement is 2 years.
Combining the estimated funeral costs and income loss, a term life coverage amount is typically $50,000.
Step 3: Compare providers and procure the insurance
This step may seem the easiest and obvious but there are some points to note.
Firstly, you will need to research and find out the available options in the market. A good place to start is to search online for direct insurance providers. These companies offer policies which removes the middleman – financial advisors and translates the savings into lower premiums. It will also be a good basis to understand your options and benchmark.
Other options to look for is the policies or programs that your labour unions or occupation associations. For example, there are logger labor union insurance.
Second step: start reaching out to financial advisors to tap on their market knowledge of insurance products available. Direct insurance is usually limited in terms of coverage and hence, reaching to financial advisors will give you access to more policy types. While advisors provide valuable services such as assisting in claims and keeping you updated with insurance changes, there may be possible conflicts of interests where they are incentivized to sell products with higher commissions. The key here is to stay focused on your needs and strategies while using your research in the previous step as a benchmark as you speak to them. It will be on your judgment to decide if an insurance policy suits your needs.
Lastly, diversify your insurance providers. While insurance is to remove your risk of an event, there is an inherent risk of your provider being bankrupt. In such cases, you will lose your coverage with premiums paid. This is uncommon but has definitely happened before . The insurance provider and financial advisor will incentivize you to buy all policies with them by throwing in discounts or additional benefits as it makes you shop with them more. It is imperative that you also consider and manage this risk.
While there is no need to buy just 1 insurance policy from each insurance provider, the key is to ensure you have bought your policies separately from at least 2 providers.
In summary, first do your research on what’s available to get a sense of pricing and coverages offered. Then, reach out to financial advisors to find out more and cover for any gaps in your research. Lastly, when getting your insurance, it is important to diversify your insurance providers.
Step 4: Purchase insurance
After the research and sourcing is done, now it is time to make the purchase. Work is not completed yet and before you buy, ALWAYS ask for the policy to be drafted for review. This is the last chance to ensure there are no red flags or issues.
Some points that you should scrutinize in the policy.
- Coverage Amount
- Instead of just looking at the amount highlighted by the insurer, check to understand if the coverage is indeed what you understood to be.
- In addition, check into each benefits. For example, depending on the body part, different claim amounts might be capped. Don’t be shocked that your eye is worth less than 100% of your coverage.
- Insured person and beneficiary
- Ensure that the insurance policy is covered for the right person. If the intention is to replace your income in your absence for your family, the insured person should be your name and beneficiary is one of your family member (typically spouse). There are serious complications relating to taxes and claims handling when you get these wrong (trust me)
- Insurers reduce risks by excluding specific issues. A logical example is pre-existing health conditions. Know where you are not protected by the insurance and appeal if needed.
- Read the definitions
- Different insurers have different contract writing and hence, very different coverages. For example, loss of sight vs loss of 2 eyes; loss of mobility vs loss of limbs. These meant separate legal concepts. Using the first example, the former will pay only when you lose sight while the latter pays when you physically lose 2 eyes. These are writings that insurers deploy to not pay you! Read between the lines and understand what they mean.
- Check the distribution costs
- This may or may not be available depending on jurisdiction but distribution costs basically indicate the commission value that your advisor is receiving. While its fair to compensate for their efforts, do not overpay too much.
- This will also give a sense of the value that your advisor is providing. Find someone reliable, stable and willing to commit to the job.
- View the investment fees and load charges, if applicable
- Insurance policies have evolved to include investment schemes due to its lucrative features of fees and charges. While it has its use cases, calculate the fees incurred. You are generally better off investing on your own and save fees.
Once all of these are reviewed, you can then proceed with the purchase.
Give yourself a pat on the back as you have finally made the most informed and important step to sorting out your insurance coverages.
Step 5: Re-evaluate on a regular basis
No plan will last you forever and it is important to keep a view of your changing needs and plans. The review need not be often but should at least be annually. You will also need to record down your insurance policies and its details down to do this review efficiently. We have a holistic tracker that can help you manage all of these. To receive the tracker, subscribe to the newsletter!
This should also be done synergistically with your financial advisors as they are aware of latest policy and government regulatory changes.
Here is a checklist of points and some examples to go through:
- Any change in life situations that warrant a change in needs: a birth or death in the family, divorce/marriage, lifestyle changes, change in income due to promotion or job loss, approaching retirement age
- Any recent updates on the policy benefits or government benefits/restrictions?
- Are premiums still affordable and value provided commensurate with the premiums paid?
The above steps should form your framework towards getting your insurances to hedge for life risk events. The key is to understand your expected needs, balance the costs and plan for risk events appropriately.
We have a holistic tracker that can help you manage all of these. To receive the tracker, subscribe to the newsletter!
Write in to us if you have any questions or feedback.