Tips on personal insurance

1. How much life insurance do I need?

It depends on your personal circumstances. If you have dependents, you should aim to insure for 5 to 10 years of your earnings. If you have accumulated savings, the insurance cover can be reduced by this amount.

For example, if you earn $40,000 a year, you should have life insurance for $200,000 to $400,000. If you have accumulated savings of $50,000, this can be reduced from the amount of your insurance.

As a minimum, you should insure for 5 years of earning. If you are able to afford it, you can increase your coverage to 10 years of earning.

The sum assured is payable on death and permanent total disability.

2. What type of life insurance should I buy?

You should buy decreasing term insurance that covers you up to your retirement age, say 65 years.

If you are now 35 years old, you can buy a decreasing term insurance to cover you for 30 years.

If your sum assured is $300,000, you will be covered for $300,000 during the first year. The sum assured will reduce by $10,000 for each subsequent year, until it disappears completely at the end of 30 years.

The reduction in the sum assured each year will be offset by your savings for the year. As your savings grows, you need less coverage for your life insurance.

The premium that you pay for decreasing term insurance is about 50% of the cost of level term insurance. It is about 20% of the cost of a whole life insurance.

By paying a lower premium for your decreasing term insurance, you have more money to save in a low cost investment fund to earn a higher return for your future needs.

3. Do I need medical insurance?

If your employer covers your medical expenses, you do not need any personal medical insurance.

If you wish to buy a personal insurance now, so that you are assured of continuing coverage after your retire from work, you should choose a low cost Medishield plan provided by the Central Provident Fund.

There are many Shield plans in the market. They cover different classes of wards in restructured and private hospitals.

In selecting your plan, you should consider the total lifetime cost. You should add the premium for the various ages from now until you reach age 85 years. As the premium rate increases with age, you must take the higher cost into account, when you select your plan.

There is no need for you to buy an expensive plan, unless you have a high income. If you enter into a subsidised ward, your medical expenses will be quite affordable and can be covered by Medishield or a lower priced private Shield plan.

Do not spend too much premium on your Shield plan when you are young. You need the savings to cover your insurance premium and medical expenses when you grow old.

The Shield plan has a Deductible and a co-insurance portion, which have to be paid by you. Some insurance company offer a rider to cover these items. As the amounts are not large, you do not need to buy the rider. You can pay them from your Medisave account.

4. How much should I spend on insurance?

You should spend not more than 2% of your earnings on the life and medical insurance on your life. If you include your family, you should spend not more than 3% of your earnings.

By spending less on insurance, you can set aside more savings for your retirement. This should be 10% to 15% of your earnings.