When is it too early to buy insurance? How do you know if you're buying too much too early?

Hi anon,

It is never too early to buy insurance. Buying early locks in insurability. That is why parents get their child covered within 2 weeks of birth for hospitalization, etc. I've seen female clients at the age of 21 who are no longer insurable due to diagnosis of SLE (a covered CI) at such an age. Her dad has money to pay, but she no longer has the health to buy anything, and has to fall back on a smaller policy bought when she was born (covering $50K, but that's barely enough)

However, I do agree that premiums will be a key consideration, especially if your father is a sole breadwinner. If your dad is paying, ensure that he doesn't exceed 15% of his income in total for the premiums for the entire family. He should also be insured since his earning capacity is what keeps the family going. Alternatively, he can buy a smaller sum assured first, and your siblings can top up later when they have a full time job. Having some form of coverage is better than none.

In general, I would use a guideline of 5 years of expenses (not income) and an additional sum for out of pocket expenses. Thus, regardless of their expected income, their average expenses when they start working can still be estimated, and the out of pocket sum can be decided by clients. This allows the coverage amount, such as the basic sum assured and the multiplier to boost their cover during working years, to be determined. So if a $100K x 2 coverage policy is too expensive, a $50K x 4 policy will be cheaper and still functionally the same.

If it is their intention to lock in a critical illness plan to ensure that they can be covered without excessive premiums, you would be able to get close to $200,000 in coverage with a term renewal plan.

There are a few factors to consider:

1. You will want to lock in the health cost of the critical illness because your siblings are healthy. Critical illness products are very health sensitive

2. Whether or not it is cheaper is relative to the current stage of life. Considering that your father will be the sole breadwinner and be the payor of this, factors such as his age, health, job security and retirement age are very important factors before deciding on whether to embark onto a cash value plan for your siblings.

I often view this problem as a "guarantee cover now at what you can afford" problem.

In order of priority:

1. Your parents should first be sufficiently covered, especially your father because he is the sole breadwinner

2. Depending on the cashflow leftover, I would allocate up to the max of 3-5% of after-CPF cashflow to guarantee coverage for your siblings. Whether or not the policy has cash value, or a renewal term highly depends on the health of your family's cash flow, reserves and financial health.

3. My advice is not to overextend and be very careful of the financial decisions, largely because I would assume that your father is nearing retirement and he needs to keep that in mind as well when he plans for his cashflow.

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