How to invest - Part 2 ~ My Finance Marathon

Before you start investing, you should ensure that you have sufficient insurance coverage.

For most of you, your first encounter with an insurance agent might be when your friend joins an insurance agent or for Singaporean guys, it may be Aviva.

In my case, my first brush with insurance was during my Basic Military Training in the army where an insurance agent called me for a meetup. Being a curious person, I agreed to meet with him. We had a 1-hour talk regarding my personal finance and he recommended an endowment plan to me (Some sort of savings plan with minimal life insurance coverage). Well, I did not sign up for it as I did not want my money locked up.

While I can see the potential benefits of an endowment plan especially for those who are not able to control their spending. I feel that these insurance agents are trying to sell a product that many of us would not be able to comprehend at such a young age. Such policy usually lasts for around 10 years, meaning to say those that had signed up would not be able to 'touch' their money till then. Unless they are willing to pull out at a loss.

Note: He wasn't the last insurance agent trying to sell insurance plan to me over the course of my National Service

While you may have similar experiences with an insurance agent, we should not shun getting insured.

3 reasons why you should buy insurance

1. To cover unexpected events

We will never know what will happen to us. If for example you are admitted to the hospital for certain health complicated(touch wood), I am sure you do not want finances to be set back by the exorbitant hospital fee. With insurance, in this case, an integrated shield plan, our hospitalization fee can be offset by the insurance company.

As such, to prevent such unexpected events from impacting our financial goals, getting adequate insurance is paramount.

2. To ensure your dependents are provided for

What if one day you are no longer around and unable to provide for your kids? If you had life insurance covering you, you can rest assured that they would still be able to carry on with their life without worrying about finances.

3. To protect your investment

While it is important to make your money work for you by investing it, one should not be dumping all your money in. In fact, it is important to have some extra cash at hand to cover any unexpected expenses. This is best complemented by insurance policies which can prevent your pocket from burning.

We do not want to have a case where you have to withdraw your money from the stock market just to pay off some unexpected expenses like car mortgage etc.

Types of insurances

Life insurance - the sum assured when you die or become permanently disabled

3 types: Term Life, Whole Life and Investment Linked Policy. Term Life has no investment component, while Whole Life invests in insurance company participating funds and Investment-Linked Policy invest in unit trusts of your choice (returns are not guaranteed)
Recommended Benchmark: 10 x your yearly income

Term life is much cheaper - up to 10 times - compared to whole life. Plus, you cancel it at any time you wish without losses. Insurance agent usually earns lesser commission from selling term life as compared to others. Term life is also better suited to your actual needs because you don’t need life insurance once your kids are living on their own.

If you have dependents that rely on you to survive then take out a term life insurance for 20 years or until 65 to cover them for 5 to 10 years’ worth of expenses.

Hospitalization - plans that cover medical bills.

Integrated Shield Plan is like an 'upsized' version of Medishield. Its main purpose is the complement Medishield by giving more payouts to cover one's medical bills
Recommended Benchmark: Private Hospital (or at least public A). The reason is that there are differences in treatment from both private vs public hospitals and it’s quite a world of difference.

Accident plans - the sum assured when met with an accident that results in death or loss of limbs or permanent disability

Do check if there is coverage for accidents caused by personal oversight (slipping), accidents caused by a third party, high-risk activities and occupational hazards

Disability income – monthly income if you are unable to work due to disability

Recommended Benchmark: >$3000/month payout to match your salary

Critical illness - the sum assured when you get CI, e.g. cancer, organ diseases

Consider getting cancer insurance in addition to a broad-based CI.
Recommended Benchmark: 5 x your yearly income

Annuity Plans - Provides Annual Cash payouts, limited Death and Total Permanent Disability Coverage.

Annuity plan can be part of your retirement plans which provides a monthly regular income
If you purchase the annuity plan with the use of the SRS account it gives you tax exemptions. This means that the amount you top-up into the retirement plan with the SRS account and the income that you receive from your retirement plan would not be taxable.

Finding the right insurance

I have listed some websites you can use to explore more on insurance.

§ MoneyOwl (Insurance, Invest, Will, Integrating National Scheme)

§ SingSaver (Travel, Home, Maid and Cancer Care Insurance comparison)

§ ValueChampion (Insurance comparison)

§ Gobear (Car, Travel and health insurance comparison)

§ BudgetDirect (For Car/Motorcycle/Travel Insurance. No agent commission, if the renewal quote is lower than theirs, you will get $100 even if you do not buy)

§ CompareFirst (Comparison Site)

*You can consider getting Direct Purchase Insurance (DPI) instead of buying from a middle man as it will be cheaper

Learned something? This is a 4-part series article so do look at other parts on how to invest to further improve your finance knowledge.

My Finance Marathon