3 Ways To Insure 10x Of Your Annual Income
A comprehensive study of the insurance protection gap in Singapore reveals that on average, we should be insured for 10x of our annual income. As a rule of thumb, you should be insured for $300,000 if your income is $30,000 a year.
This article is not about from whom can you buy insurance from but rather how you can get yourself sufficiently insured and I hope that by making it simple for you to understand, it will help you make better decisions when it comes to the process of buying life insurance.
Renting means having an agreement to temporarily use a product or service. Life insurance can also be “rented” through buying what is known as a term policy. It is a low cost way to buy insurance especially if the need to have insurance is for a short or a clearly defined period.
For example, if you are planning for a week long holiday to Hong Kong, you will probably plan to stay in a hotel. While you can buy an apartment to stay for the period of the holiday, it wouldn’t be financially or practically sound to do so. On the other hand, if you intend to migrate to Australia, your preferred arrangement will most probably be buying a home instead of staying at a hotel as the period is long and undetermined.
A fresh graduate protecting against the loss of future work income, a property buyer protecting the ability to repay the loan and a new parent protecting the responsibility to provide for the child’s dependency years are some common examples of why someone will “rent” insurance as there is a defined period of insurance need and the coverage required is usually high.
As a guideline, if the need for insurance is for a period of 20 years or less, renting or buying term insurance will be preferred. However, not everyone (myself included) likes to rent their insurance because there are no savings or accumulation value. In other words, not everyone likes to accept insurance as a “cost” especially those who are savers by nature.
This brings us to the next way to get yourself covered…
Use returns from your savings to pay for it
One of the biggest obstacles toward the acceptance of term insurance is an emotional one. No matter how low the premiums are, some people are just uncomfortable with the idea of paying premiums for insurance over a period of time and if nothing happens at the end of say 20 years, there is nothing back.
On the other hand, people generally do not mind seeing insurance as a form of savings. Emotionally, the idea that at the end of the day, there is always something back provides the comfort that there is no loss and the premiums are regarded more like disciplined savings.
I’ve learnt to respect that people are different and for those who are just uncomfortable with the idea of writing off insurance premiums as a cost, they have the option of buying term insurance with a “premium cashback option”.
It’s like arranging to rent a house from a landlord for 20 years and at the end of the 20 years, all your rental will be refunded back if your keep to the agreement for the full 20 years. The real “rental cost” in such an arrangement will be the returns you would have generated from the savings.
The main drawback for buying insurance this way is that the premiums is much higher than a simple term insurance arrangement. Thus, it will only be suitable for people who have the financial means to insure in such a way.
For those who do not have budgetary constraints, there is yet another way to get covered…
Own it outright
Not all needs are short term. Not all financial needs are limited to 20 or 30 years. Before retirement, we worry about the loss of income. After retirement, we worry about the loss of assets. There is a need for financial protection before age 65, there is also a need for financial protection after age 65.
As an example, for insurance needs such as critical illness protection or spousal protection, I don’t recommend that you “rent” it. Certainly, it will be quite a difficult conversation with your spouse that “I will protect you until the age of 65” when in the marriage vows, it was quite clearly stated that “you will love and provide till death do us part”.
The logic is simple, if you intend to stay in a country for a long and indefinite period of time, buying a home is a more logical and practical way to go about planning your lodging than renting. In this case, this type of insurance is known as “whole-of-life” insurance and the purchase of a “whole-of-life” insurance is similar in nature to that of purchasing a freehold property. It is the purchase of an asset that is expected to increase in value through time until the day you “cash out”.
What I’ve described are three ways to create insurance protection and there are certainly other ways not described. A good insurance portfolio will usually also consists of more than one type of plans as generally, all of us have both short term and long term financial protection needs.
Needless to say, your GEN planner is well versed in helping you to review your specific needs and make recommendations to suit your unique situation.
Don’t do it alone when you can get a qualified and trusted opinion from us.
Article by Lee Meng Choe, FChFP
P.S. Do you know that your GEN Planner is able to provide advice on insurance from more than 10 life insurers as a representative of PIAS? Make sure you ask your GEN planner for a trusted opinion.
(NOTE: Get our Financial Planning Philosophy (Building Transferable Wealth Guide) as a guide to help you plan your life finances. Get your FREE hard copy delivered to your home here)