Are You Worth More Dead or Alive? August 8, 2023

Midway through 2023, we found ourselves persistently grappling with high inflation rates and interest rates. During these hard times, one may begin to question their financial status and wonder: “Are we worth more dead or alive?” Thus, risk planning becomes crucial to boost resilience in this uncertain environment.

So what exactly is risk planning and should we avoid the word “insurance” when we seek answers about our financial portfolio? In our current world of high expenses and rising costs, it’s essential to understand the true significance of insurance and risk management to fully capitalise on its benefits for your portfolio. Some people joke that they are worth more when dead. Shouldn’t our present worth be greater before death? Therefore, one should never over-insure or buy unbeneficial plans plainly out of fear without understanding if the plans fulfil their needs.

Insurance serves as a Financial Risk Management Tool that provides a safety net in the event of emergencies. Basically, it transfers risk to the insurance company for a fee, known as premiums and in return to allow us to plan for the worst-case scenarios such as, illness or disability, and avoid being burdened by high medical and living expenses bills. For your loved ones, it is a safeguard from debt that could be incurred due to the inability to bear the above-mentioned expenses, as well as provide a sense of security for those without self-care ability through payouts.

Understandably, navigation in the realm of insurance can be overwhelming. However, careful planning around the following five areas of expenses, could possibly boost financial resilience and mitigate the risk of overspending. With proper consideration of these aspects, one can make informed decisions to enhance financial security.

1. Final Expenses

The final expenses include Funeral Rite costs, unpaid income taxes and estate planning expenses. These are needed when one passes on and can be covered by the Death Benefit Payout for the deceased’s family.

2. Living Expenses

Our earnings are used to cover our living expenses. In the event of illness and disability, we could stay ahead of our financial planning via Critical Illness, Disability Protection and Long-Term Care Plans, CareShield Life.

3. Medical Expenses

Medical inflation has been a point of concern in the current market and incurring hospitalization debt might be inevitable for some of us. The risk of this can be reduced by enrolling in a hospitalisation protection plan such as, MediShield Life. Besides that, we could also get coverage for outpatient bills through Accident Plans and company insurance plans.

4. Loan Liabilities

Our loved ones tend to fall into the risk of debts when we pass on. In Singapore, the most common liabilities include loans from housing, car purchase and education which could pose a challenge for loved ones. To address this concern, a Death Cover can be considered to provide coverage for the liability amount, ensuring that the debt would be paid off by who? In the event of an unexpected passing.

5. Human Economic Value

The passing of the breadwinner in a family has a significant impact, leading to the loss of earning ability and causing of economic hardship. Insurance coverage provides a way to safeguard against this loss and replicate the lost earning in the event of such a tragedy.

To cover potential shortfalls, we could plan for Death Coverage, Critical Illness (CI) or Disability and medical benefit based on the breakdowns mentioned earlier. For instance, for Loan Liabilities, one should consider a term coverage with the right tenure to match a mortgage loan of S$800K for 30 years and a car loan of S$100K for 5 years. This ensures that the aforementioned liabilities do not become a burden for your loved ones.

Remember, quality should take precedence over quantity when it comes to insurance. Focus on whether the basis of the insurance aligns to your current needs and be careful not to be swayed by cover types with lavish nomenclatures. Here are two important points of consideration to help with deciding how much insurance to purchase:

1) What is the quantum and how do we come up with that value?

2) While the plan should cover the years of risk applied, what is the tenure of this risk and how long will it be liable?

Here is an example of how to apply them when purchasing a Critical Illness Plan:

To begin, we must understand that the purpose of a Critical Illness Plan is to cover one’s expense replacement. Hence, the minimum coverage amount should be calculated by multiplying the number of years covered by the annual income. Applying this to a 5-year coverage policy, if one has a yearly income of S$80,000, the minimum cover for a Critical Illness / Total & Permanent Disability plan should be at least S$400,000 for adequate protection and financial support.

In conclusion, it is essential to review our current portfolios to align them with our specific risk protection needs. The ultimate goal is to improve our financial resilience by leveraging existing government plans such as MediShield Life, CareShield Life and the Dependent Protection Scheme. To achieve better planning, we should supplement these coverage plans with comprehensive solutions offered by reputable insurers.

Seek the advice of a certified financial planner so that he or she can help to recommend and explain how to structure your risk portfolio with the right solutions from various providers.

Contributor:

Steffi Teo Dai Wen
Wealth Manager
Phillip Securities Pte Ltd (A member of PhillipCapital)