Critical Illness (CI)
Early Critical Illness (ECI)
Term Life Insurance
Whole Life Insurance
Asked on 12 Feb 2020
-WL 100k death/tpd, 20k CI, $1200 p.a (purchased by mum)
Opt.1: Basic WL (50/100k death) with CI (100-200k) & separate multipay 100k ECI&CI till 70/75. Can boost with 500k death term in future if I have dependents. Rationale for WL being the lifetime CI, but statistically speaking will I need it? Otherwise i'm not keen on paying more for cash value as I do etfs on the side.
Opt.2: Term 500k death/tpd with multipay 100k ECI&CI till 70/75
Budget wise under 2.5k p.a
After you retire, should CI strike, you will be faced with a number of costs that do not normally occur in daily life. For example, you might need to get mobility aids, hire a caregiver, etc, all of which might not be factored in on a day to day basis.
At this point in time, would you prefer to dig into your own resources, or have a pool of money to tap on? I would very much prefer the latter, rather than drawing down on my retirement fund.
Thus to me, a basic level of CI/ECI cover is important even in retirement. Therefore, one of the more cost effective methods of achieving it will be via a limited payment whole life plan, i.e. option 1. Multipay CI is a decent add on to a WL plan, but the WL plan is really your last line of defense as it will stay with you forever. Not that you can't get a Multipay plan till age 99, but at what cost, and what if you never make a claim on it? A multipay in my view helps to boost coverage during your working years, especially when one is young and healthy but with limited resources to fund the fight against CI.
For option 2, a term plan with a multipay rider is also another option to boost cover for CI/ECI, as long as you accept the fact that when the plan ends, coverage ends also. Thus my rationale for having a basic WL with CI or ECI as the last line of defense, and boosting your cover (should you need it) via a term, or a seperate multipay (after you have considered your budget and if you can afford it)
Lastly, it's great that you are doing ETFs on the side, but ETFs, being an investment are subject to market risk. Thus, if you consider Murphy's law, it is possible that in the midst of a market crash, your ETFs drop in value, and then it just happens to be also the time where a CI strikes. Will you want to sell your ETFs just to raise funds? Insurance as an asset class is a guarantee, so the payouts are independent of market conditions. This provides you a peace of mind. No ETF can guarantee you a payout of any form.
At first look, your existing insurance coverage is definitely not enough for the long run. In order for us to have a detailed analysis, it will be valued to have a complete understanding on your existing portfolio. Through this process, it allows us to understand the coverage that we have, any financial gap, as well as to find out whether we are overpaying for our insurance policies. I have highlighted the rest of the reasons here: https://www.blog.pzl.sg/why-every-client-needs-an-insurance-policy-summary/
For critical illness or any medical condition in general, the most important coverage will be your healthcare insurance. This will provide the most value for dollar against hefty medical bills.
Next, we will go back to the basics by understanding the reason why we need critical illness coverage. For instance, it could be to pay off existing loans, income replacement, or to cope with rising expenses over time.
Through comprehensive financial planning, we will be able to conduct detailed planning to allow you to understand how your situation will be like upon retirement. Moreoever, in most cases, yes, you will want to have critical illness coverage for as long as possible.
This is partly because healthcare insurance only takes care of medical bills within the stipulated limit. I have explained them in greater detail here: https://www.blog.pzl.sg/what-does-integrated-shield-plan-cover-in-singapore/
Accordingly, the natural question that arise will be, what if there is a much better treatment elsewhere, but it is not covered by your healthcare insurance. In such case, how are we going to afford the cost of treatment to alleviate the pain that we are going through?
All in all, I will suggest you to understand your needs further in order to get the right planning for your future. For instance, if you need lifetime critical illness but not whole life insurance, then you should not pay for the whole life insurance that you do not need. In other words, insurance is a tool to fulfil your needs, and not vice versa!
There are various options that you can consider. Once you know your needs, then find the right solution that fits into your requirements. Never overpay for anything that you do not need.
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It is great that you are thinking about maximizing your dollar and doing careful planning with your budget.
The objective of CI and ECI after retirement is to ensure that you do not need to dip into your asset in the event that it occurs.
While your ETF strategy is fantastic, the return and volatility does not provide guaranteed capital flows. Which is why it is important to have CI and ECI policies in place as a safety net.
A few things which need to happen post retirement as a rule of thumb:
You should not be paying for premiums in CI/ECI. If possible, a limited payment term pre-retirement would be better to guarantee a cover without future premium committments during retirement.
You should still be covered for hospitalization insurance because this will defray a large portion of potential medical bills. This will be an ongoing expense, so I highly recommend thinking about a strategy for this, given the uncertainty we have today about rising premiums.
Lastly, I would not recommend that you put off your disability insurance. $100,000 is not enough for the average Singaporean. It is not a question about budget in most cases, but rather, whether clients can purchase insurance due to their health.
Disability insurance is cheaper when you're young, and very often, people overlook the importance of it.
As for budgeting, cap your insurance premiums for protection up to 5-10% of your income after CPF contribution.
Hope this helps!
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16 Feb 2020
I think for me personally, I would prefer option 1, as satistically speaking, the average mortality age of Singaporeans is 85-86 years. And also because there is the flexibility for you when you want to increase the coverage as needed, especially if you do have a kid in future.
But of course speaking in terms of guideline for CI coverage, Hariz has mentioned that it should be 5x your annual income, so in regards to how much you should be insured, do calculate as needed.
I think in regards to cash value, we cannot just look at our current situation now because technically our income would increase with time, and insurance premiums are usually level once we have already incepted the case, so that could be something you can think about as well
I do believe CI cover is important after retirement even if you have no dependents. Reason being you want liquidity in your estate to pay for any long term chronic costs without the need to dip too quickly into your retirement fund. You're basically protecting your retirement fund.
A good gauge for how much CI cover you need now is 5 X Annual Income. And how much CI coverage would be good after retirement would be about 25-50% of your retirement nest egg.
Part of retirement planning is understanding de-cumulation of assets. Much of your assets would usually be either fixed in a property or variable in equities, and fixed in bonds or annuities. Having free cashflow above the maximum withdrawal rate is hard to plan accurately.
CI cover gives you cash without needing to handle selling off assets. You may not even be the one making the financial decisions anymore should you be mentally incapacitated. Thus, a lumpsum comes in handy.