The MoneySmart Guide to Retirement Part 2: Insurance Protection
So, you made it through the Singapore education system and now have a job that pays you an okay salary. You’re even saving and investing for financial goals like retirement.
You’re on the right track, but if you’re not doing anything to protect your hard-earned cash, that’s like putting all your gold in a vault but forgetting to lock the door. Or putting all your eggs into one basket, and then dropping the basket from the top floor of an HDB block.
In this 4-part series created in collaboration with CNA, we’ll take you through some of the basic principles behind retirement planning. Today’s installment is on insurance, which helps you protect your wealth in the event of misfortune.
Unexpected events can wipe out your savings
It’s a lot easier to lose money than to earn it. Think about it how long it takes you to amass a six figure sum. Well, a single stint in the hospital can wipe it out overnight.
Insurance helps to protect you against that. For instance, if you have insurance that covers your medical bills, you don’t have to worry about your savings getting decimated if you get injured or fall sick.
Insurance is an expense as you need to pay premiums to the insurer in order to enjoy continued protection. However, this is one expense you should not skimp on, as it can potentially save you from bigger financial losses in the future.
The mix of insurance policies you need when you’re young does not stay the same all your life.
For instance, when you’re in your economically active years and supporting a household, health insurance and critical illness insurance can protect you against the financial loss associated with illnesses.
However, premiums rise as you get older, which might prompt you to rethink the cost-effectiveness of certain insurance policies. Conversely, some types of insurance like long term care or disability insurance might become more relevant as you age.
I won’t go through every single policy you could possibly buy in this article, but know that your needs will vary according to your family, financial situation, income, budget and age.
Hospitalisation insurance, which covers the cost of medical treatment if you get hospitalised, is one of the most essential types of insurance to get in Singapore. If you have no other insurance, this is the first type of plan to consider.
Singapore Citizens and Permanent Residents are already protected by a very basic form of health insurance called MediShield Life. However, MediShield Life is meant for use in B2/C wards at public hospitals, so the caps on how much you can claim are relatively low. Any remaining sums will need to be paid in cash or from your MediSave account, which is itself subject to withdrawal caps.
In other words, if you land in the hospital and only have MediShield Life, good luck.
In order to supplement your MediShield Life protection, insurers have come up with something called the Integrated Shield Plan (IP). This is one of the most affordable forms of hospitalisation insurance in Singapore, since it doesn’t need to replicate your existing MediShield Life protection.
Like wrinkles and white hair, IP premiums increase with age. So, while you might be able to afford the most expensive riders as a youngling, you might have difficulty keeping up with you’re older.
For instance, NTUC Income’s Enhanced IncomeShield Preferred plan’s annual premium is $255 when you’re aged 21 to 30. This rises to $1,592 when you are in the 61 to 65 age band, and $3,113 when you’re aged 71 to 73.
One way to keep your premiums manageable as you age without losing protection altogether to is to reduce your protection to cover a lower ward tier, which can usually be done by scaling back on your riders or downgrading to a lower tier plan.
Long term care insurance
CareShield Life is another government scheme you might unknowingly be covered by. This long-term care insurance scheme offers a monthly payout if you become severely disabled.
For those born in 1980 or later and aged 30 and above, you are already covered by CareShield Life. If you’re young enough to not remember life without the internet, you will be enrolled in the scheme when you turn 30. For everyone else, participation is optional from the end of 2021 onwards.
CareShield Life gives you monthly payouts starting at $600 if you are unable to perform at least three of the following Activities of Daily Living (ADLs) without assistance: washing, dressing, feeding, toileting, mobility and transferring.
As you can see, you’ve got to be in a pretty bad state before you qualify for CareShield Life payouts. So, private insurers have stepped in with CareShield Life supplements, which can boost your payout amounts and make it easier to qualify for them.
The premiums for CareShield Life supplements rise the older you are, but you can lock in a lower premium by signing up earlier.
For instance, to get a $1,200 monthly disability payout, a 30-year-old female would pay $337.40 a year for NTUC Income’s Care Secure CareShield Life supplement, but a 40-year-old would pay $735.40. In both cases, premiums would be payable until age 67, and protection would continue for the rest of the customer’s life.
To complicate matters further, most insurers limit the age at which you can sign up for their CareShield Life supplements to a certain range, typically starting from age 30 until anywhere from 40 to 60+.
Signing up at an earlier age tends not only to reduce your annual premiums, but also the total amount you will pay over the entire premium payment period. So, you can save some cash by signing up once you hit 30 to lock in a lower premium.
Scenario: What happens if you’re not insured?
Let’s take the example of Uncle Tan, who reaches retirement age without any insurance.
One day, Uncle Tan gets diagnosed with prostate cancer. Because he cannot afford to deal with long queues at this stage of his illness and wants to be able to choose a highly recommended doctor for the best chances of survival, he opts for a private hospital.
Based on MOH’s historical transacted bill sizes, the median bill incurred by a patient who undergoes removal of the entire prostate and surroundings is $56,119. The bill involves surgeon fees, anaesthetist fees and facility fees, but not prior costs incurred such as scans and diagnosis. All of that would have to come out of Uncle Tan’s MediSave and cash savings.
If Uncle Tan had hospitalisation insurance in the form of an IP covering Class A ward stays in private hospitals, he would only have had to pay a deductible and co-insurance, and the insurer would have taken care of the rest.
Assuming a deductible of $3,500 and a 10% co-insurance portion, he would have paid a total of $8,791.90 for this particular hospital bill, not counting his other costs incurred in the diagnosis of the condition.
What’s more, if Uncle Tan had decided to buy a rider reducing his total co-insurance to $3,000, he would have paid only $3,000 in total to cover not just his hospital bill but also other related medical costs incurred before the operation.
How to balance coverage vs cost
While nobody should be walking around with insurance, don’t go overboard and over-insure yourself. In other words, you don’t want to spend all or even most of your hard-earned cash on insurance.
Financial advisors tend to advise that you spend 3% to 10% of your take-home pay (after CPF deductions) on insurance for protection, not including Investment-Linked Insurance or other types of insurance meant to help you accumulate wealth.
But really, it’s very personal. If you’re a high income earner who spends very little and has no kids to inherit your wealth, you probably don’t need to spend even 3% of your income on insurance premiums.
Other than taking the time to work out your true insurance needs, you should also consider how your needs will change with time.
When you are retired, you might no longer need certain types of insurance or might wish to downgrade certain policies. For instance, if your sole reason for buying life insurance is to ensure your kids and aged parents continue to receive financial support if something happens to you, you will no longer need it when you reach a certain age (assuming your kids don’t turn into hikikomoris).
Another way to ensure you don’t get saddled with excessive insurance premiums in old age is to opt for limited pay policies wherever possible. Such policies collect premiums from you over a fixed number of years, after which you can sit back and enjoy your protection without continuing to pay. This model is common with whole life insurance plans as well as CareShield Life supplements.
At the end of the day, insurance is there to protect your finances. But overdo it and you could find yourself like that kid who barely sleeps because he has 20 hours of tuition a week — in a worse position overall.
In other words, insurance coverage is important, but not so important that you should spend all your cash on it. Thus, it’s worthwhile to slowly work out your precise insurance needs and buy exactly the amount of protection you need and no more.
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