Personal Financial Planning – Insurance

Insurance is the most common risk transfer technique in risk management.

There are 3 layers of insurance protection.

First, the social stratum, provided by the national schemes. For Singapore, it will be CPF insurance like DPS, HPS, Medishield, Eldershild, CPF Life. In general, they are the most basic requirements and the premiums are more affordable. Second, the group layer. This is coverage provided by employers, unions, or associations. Their premiums are also relatively affordable. However, they will stop covering when you leave the organization and there is often an age limit, which causes coverage to be reduced when it is most needed. Third, the single layer. This is purchased from insurers on a personal level to supplement the first two layers. Improve coverage in scope and depth.

Insurance classes:
– Life insurance
– Investment Linked Policy (ILP)
– Health insurance
– Personal General Insurance

Life insurance
The 3 main types of traditional life insurance are term, whole life, and endowments. The most basic term policy is the CPF Dependent Protection Scheme (DPS). Premiums are the lowest in Singapore and can be paid by CPF OA. However, the limitation is that the coverage is up to $46,000 and 60 years. Another declining term policy from CPF is the Home Protection Plan (HPS). A mandatory mortgage insurance for those who use CPF to buy their properties.

Investment Linked Policy (ILP)
ILPs are primarily renewable annual term insurance along with investment in unit trusts and the addition of more charges. They are subject to a different set of decisions, do not need trustees, and fund selection is restricted to those within the insurer’s fund umbrella. One advantage is that the charges are transparent. However, they are numerous, tedious to calculate, and allow for so much variation that they are intended to confuse. They include:

(1) Initial Sales Charge: This is a one-time charge that is included in the fund’s bid-ask spread. Usually around 3-5% of the investment amount.
(2) Fund administration fee: paid to the fund manager regardless of the fund’s performance. Typically 0.5-2% per year and is priced in (deducted) from the unit price.
(3) Benefit Charge: The insurance coverage premium, including all riders, is financed by unit deduction. The premium generally increases based on the new age range.
(4) Policy Fees: A fixed monthly fee is charged, regardless of premium amount, to cover administrative expenses.
(5) Administrative Fees: Additional fees paid for record keeping, transaction services, banking services, trustee services, and miscellaneous fees. Usually around 0.2-0.4% per year and is also included in the price.
(6) Funds Switching Fees: Will be charged when switching Mutual Funds. Usually free for one change per year.
(7) Premium Vacation Fees: Will be charged when the Premium Vacation feature is activated.
(8) Surrender Charges – Charges imposed upon delivery of the policy.
(9) Allocation – The amount of premiums used to purchase units is generally not 100% for the initial years. Example: 20% for the 1st year; 40% for the 2nd year; 60% for the 3rd year; 80% for 4th year; before finally 100% from the 5th year.
ILPs will be suitable for those who have sufficient insurance coverage and have an excess budget that they would like to use to support their agents rather than invest directly in mutual funds.

healthy insurance

(1) MediShield and private protection plans
MediShield is the social insurance that provides the most basic coverage. The disadvantages are that it has many sub-limits for each of the covered expenses, expires at age 85, and provides coverage primarily for class B2/C wards. Also subject to deductibles and coinsurance. It is paid for by MediSave. Some employers may provide the second layer of coverage. However, this coverage will terminate upon leaving the employer. Medical coverage is most needed in retirement, so purchasing a plan at that time will be subject to strict underwriting conditions (ie existing medical conditions will not be accepted or excluded). Private shield plans allow coverage beyond age 85, but it must be taken before age 75. It generally does not have sub-limits, as it is “as loaded” coverage. Some insurers even cover deductibles and coinsurance if a rider is purchased in addition to the basic plan. The Ministry of Health website offers a complete comparison of all available private protection plans. The plan is best suited to cover medical and ongoing treatment. With the rise in medical cost, this insurance is more necessary to prevent cost from being an issue in seeking proper medical treatment.

(2) Critical illness
Provides a lump sum benefit if the insured is diagnosed with one of 30 selected diseases or surgical procedures. The 30 diseases are chosen from a list of diseases from the Singapore Life Insurance Association (LIA). All its definitions have been standardized by the LIA. The 2 types of coverage are acceleration and additional. Acceleration coverage shares the sum insured with the death/TPD benefit. The additional cover is a separate cover in addition to the basic amount insured, so it can be greater than the basic amount. Variations include being issued as a stand-alone policy or a rider, having an advance payment for early stages of illness, and providing specific coverage for a single illness, such as cancer. It is best suited to provide the cost of treatment that may not be included in the HealthShield, such as expensive overseas or alternative/experimental treatment, as well as additional care expenses incurred when a critical illness is diagnosed.

(3) Disability income
Provides monthly income in case the insured is unable to work as a result of an accident or illness.
The definition of disability varies in that the inability to work is limited to the insured’s own occupation, similar occupation, or any occupation. It is better suited to protect against loss of income to maintain living expenses in case of disability and differs from TPD in that the definition is less strict.

(4) Hospital cash
Provides a daily cash benefit for each day of hospitalization. It is usually limited to a specific number of days and a lifetime limit. It is best suited for the self-employed who will suffer a loss of income as a result of hospitalization.

(5) ElderShield and private plans
Provides a monthly benefit if the insured is unable to perform 3 of the 6 activities of daily living (ADLs), namely feeding, bathing, toileting, dressing, moving, and transferring. ElderShield is the most basic level of coverage and provides $300 or $400 per month for 60 or 72 months. You can pay with MediSave. Private plans enhance these plans to provide greater benefits and a longer term of payment. You can pay with MediSave up to a limit. It is more suitable to cover the disability of those over 40 years of age. TPD coverage typically ends at age 60/65, but provides lifetime coverage. And usually the payment of premiums is limited.

Personal General Insurance

(1) household packaged
Provides coverage for the building and contents.
It is usually mandatory when a person takes out a home loan.

(2) valuable items
Provides coverage for items with high monetary value such as antiques, fine art, etc.
It can be detailed or general coverage.
It is usually for those who keep valuable items in their homes, such as art or antique collectors.

(3) Personal accident
Provides coverage for bodily injury caused by unique, direct, independent, external, violent and visible means.
It is best suited for those who are on a budget or involved in blue collar jobs or are unable to obtain any of the traditional insurance due to medical underwriting restrictions.

(4) engine
It is a mandatory insurance available in 3 modalities: Third Party, Third Party Fire and Theft (TPFT) and All Risk. Premiums will vary between insurers based on the make, model, age of the car, driver’s age, occupation and experience. Please note the applicable excess amount and it is advisable to purchase NCD protection if NCD has accumulated to 50%.

Based on the risk management plan, those areas of low frequency and high severity must be covered with the appropriate insurance. As insurance coverage and premiums vary between insurers, it will be prudent to get quotes from as many as possible. Insurance is usually a lifetime commitment, it will be prudent to ensure that the highest and most appropriate value is taken out.

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