New to Insurance? Here’s How To Avoid Being Under- or Over-Insured

This post was originally posted on Planner Bee.

Insurance is a key component of financial planning. It offers both financial protection for you and your family in case of an accident, and also serves as a safety net for your current and future needs.

However, the concept of insurance can be overwhelming, especially for people who are new to it. The range of options and coverage types will add to the confusion, making it daunting for many. Striking a balance between being over-insured and under-insured can also be tricky.

Understanding and building your insurance portfolio properly can be time-consuming but it will help protect your future and that of your loved ones.

In this article, we will look into the ways to calculate your health and life insurance needs, the signs of being over- and under-insured, and tips on how to be adequately protected.

Calculating your health insurance needs

The first step to avoiding being under or overinsured is to calculate your health and life insurance needs.

Health insurance pays your medical expenses when you are injured and hospitalised, and is one of the most important insurance you should purchase.

All Singaporeans are covered by MediShield Life, a basic government health insurance plan that aims to help cover large medical expenses. It is designed to be a basic health insurance scheme, with claim limits, deductible and co-insurance features in order to keep premiums affordable for all Singaporeans. This means MediShield Life is often insufficient to fully cover medical bills, especially with prolonged hospitalisation or treatments.

Integrated Shield Plans (IPs) are additional private insurance coverage components run by insurance companies. These plans are usually used to cover A or B1-type wards in public hospitals and/or private hospitals, and also typically feature riders to cover full hospital bills.

Source: MOH

According to the Ministry of Health’s comparison of lifetime IPs premiums, Singaporeans are looking at an annual minimum of S$41,100 for standard IPs for public hospital class B1 coverage, to a maximum of S$323,900 for private hospital plans. This amounts to an average of S$411 to $3,239 annually for an IP.

If your family has a medical history of certain illnesses cus as cancer or stroke, it is best to supplement your MediShield Life with an IP. This takes the worries off your shoulders should something unfortunate happen to you as the IP will take care of the bulk of your medical bills, especially if you have a rider that pays the co-payment and deductible.

On top of that, health insurance also includes insurance for Critical Illness (CI). CI insurance pays out a lump sum if you are diagnosed with a major critical illness, such as cancer, heart disease, or stroke. Having this insurance can offer peace of mind while you are recuperating from the illness.

Based on the 2022 Protection Gap Study commissioned by the Life Insurance Association (LIA) Singapore, the CI protection needs amount to 3.9 times your average income. Hence, for a working adult with an annual income of S$60,000, you will need to get a CI insurance scheme that will pay out $234,000 should you unfortunately be diagnosed with a CI.

Calculating your life insurance needs

Life insurance provides financial security to your loved ones in case of your death or total permanent disability, and it is especially important if you have dependents.

By using Planner Bee’s insurance needs calculator, we can project a person’s insurance needs. The minimum coverage for life insurance should be the total sum to cover your total monthly expenses excluding your personal expenses for 10 years or by the period you have indicated. If you have dependents, you may indicate a longer period you wish to provide for income replacement plus the education fund required.

Read more: How Much Life Insurance Do I Need in Singapore?

Take, for example, Lena, a single working adult making S$5,000 monthly. Lena’s total monthly expenses are approximately S$3,000, and she has no outstanding debts or dependents:

In this case, Lena will need a minimum of S$250,000 coverage in life insurance. While she does not have any dependents, the life insurance payout can take care of her if she suffers from total permanent disability instead of death due to unfortunate situations.

Meanwhile, Melissa, a mother of two young children, would require higher life insurance coverage. Similar to Lena, she makes S$5,000 monthly, with total monthly expenses amounting to S$3,000, and has no outstanding debts.

As she is hoping to provide an income for her dependents for the next 15 years should something happen to her, along with at least S$50,000 for her two children’s education, Melissa is looking at a S$420,000 life insurance coverage.

By using Planner Bee’s insurance needs calculator, you can easily check the minimum amount of life insurance and CI insurance to protect you and your family.

Signs of being under- and over-insured

Being under-insured can be dangerous as your policies will not be able to cover the full costs, and an unexpected situation can drain you and your family’s savings. Signs of being under-insured include:

1. Low coverage plans: While being insured is better than not, you might be paying too much for plans that are barely sufficient to cover your medical costs. Check and make sure your co-payments and deductibles are not too high for you to handle.
2. Insufficient life insurance coverage: If you are the sole breadwinner at home, having insufficient coverage can result in your family falling into debt or struggling to pay their living expenses should anything untoward happen to you.
3. Wrong coverage priorities: Banking on the same life insurance plan you bought when you were fresh out of school for the rest of your life without getting new ones can be detrimental if something is to happen to you. You are likely to need a different coverage level as you transition from one life stage to the next to fit your current needs.
4. Failing to regard your lifestyle: Do you have a high-risk job or hobby? You might need higher coverage than your peers who do not engage in high-risk hobbies or are employed in such a job.

On the other hand, being over-insured means you are paying for more coverage than you need. This can be financially draining, especially when you can use the money on other needs. Signs of being over-insured include:

1. Excessive coverage amount: Fresh out of school? You probably do not need S$1 million in life insurance coverage right now.
2. Duplicate policies: Holding several insurance policies covering the same risks or offering similar benefits can be redundant.
3. High premium policies: Some policies come with benefits or are tagged to investments that you do not need. These policies can be costly and might not be what you need.

Tips on how to be adequately insured

If you are just starting to look into insurance, it can be tempting to purchase comprehensive policies to cover every possible risk. However, this can lead to over-insurance with overlapping benefits.

Your life circumstances change over time, and your insurance coverage should reflect these changes. Review your policies regularly, especially after significant events in life, such as marriage, buying a home, and having children. Adjusting your coverage accordingly helps to ensure that you are neither over-insured nor under-insured.

Avoid excessive add-ons and riders, especially if they will stress you out financially. As someone fresh into the job market, you might not need that costly million-dollar life insurance. You also can skip private hospital medical insurance if the annual costs are too high. A B1-class medical insurance is more than enough for many people.

Consulting a financial advisor is a great way to analyse what insurance policies would fit you the best at your current stage in life. They can help assess your financial situation and recommend policies that match your goals.

In conclusion…

Balancing the right amount of insurance is key to ensuring you’re adequately protected without overpaying.

By understanding your needs, starting with essential coverage, and reviewing your policies regularly, you can avoid the common pitfalls of being over- or under-insured. Take the time to carefully assess your options and make informed decisions, be it by talking to friends about their insurance coverage, or finding a licensed financial advisor to help you with it.

If you want to talk to an experienced financial adviser, feel free to drop us an email at [email protected] today!