You can read chapter 2 of our eBook here.

Insurance Planning Methodology: Duration

In the previous chapter, we explained the different risks involved and discerned which risk should be transferred to insurance. Moving on, understanding more about the duration required to cover these risks is an important aspect as often individuals may underestimate this area of planning. This oversight may result in you having to pay excessive premiums or being under-insured while still working and accumulating wealth to achieve your life goals.

The duration of coverage plays a significant role in your insurance planning. There could be situations, due to poor planning, where the insurance coverage ends prematurely before achieving financial independence to fulfill your life goals, leaving your family still dependent on you. When you are ready to purchase another insurance policy to further cover this duration shortfall, you might either be uninsurable, insurable with exclusion(s), or the premium may be too expensive for your budget. Few people tend to mention or acknowledge this risk.

When constructing your insurance planning framework, one consideration is to determine whether your needs require temporary or lifetime coverage (refer to the type of life risk in Figure 2). The key reason for having such a structure in insurance planning is to ensure you get the right coverage for your needs. Figure 8 below shows an example of how we can classify our needs according to our life risk.

Figure 8: How to Classify Our Needs According to Our Life Risk

As part of financial planning, it is important for you to know your destination – also known as retirement. Once your life goal has been detailed out, the next thing is to determine the amount of resources you can allocate to each of your life goals and how to fulfill them. If fulfilling all your life goals is challenging and requires you to work additional years, you should consider being more prudent when deciding when your coverage should end.

Temporary Insurance Coverage

The main reason for having temporary insurance coverage is to cover only your active income years. This is the period where your liabilities accumulate, you may have dependents, and you are building your wealth. Let us examine this further by using examples of young children & teenagers, working adults & professionals, and retirees in their various life stages.

Young Children & Teenagers

In this example, young children & teenagers refer to individuals who are still studying. If we objectively consider the risks for this group, here are some questions you might have to consider:

• What will be the financial impact on the family if a life or health crisis strikes them?

  • Are they earning a sufficient income to subsidise family expenses?

  • Are they shouldering any responsibilities within the family?

  • Will they be taking on any loans to advance their studies or initiate their entrepreneurial journey?

  • Will they incur any medical expenses if they fall sick and require surgery or treatment?

In most situations, young children & teenagers typically do not pose a significant financial burden on the family, apart from potential emotional impacts on your family. However, in the event of a health crisis, there may be an impact on medical expenses. Therefore, life coverage is generally unnecessary for young children & teenagers.

Working Adults & Professionals

As you transition into the workforce and build a family, you will start to accumulate liabilities such as mortgage loans and vehicle loans, etc. You will also incur various expenses, including fixed household expenses, parents’ allowances, children’s daily expenses, children’s education fund, building your retirement fund, and expenses for hobbies, to name a few. Therefore, the risk of not being able to work to cover all your liabilities and expenses is remarkably high. However, these liabilities are not something that you may have to support for a lifetime but only during your working years. As such, you will need insurance that covers such expenses temporarily. This coverage includes:

1. Life coverage (mortality)

2. Critical illness coverage (morbidity)

3. Disability coverage (morbidity)

You might ask, for how long should you maintain this coverage? To determine this, consider your ultimate financial goal, such as reaching retirement age or when you no longer have dependents. Align your insurance coverage with this goal, extending it until your retirement age. Therefore, the payout from life insurance coverage can be regarded as income replacement.

Retirees

To retire successfully, achieving financial independence and settling all your liabilities or loans is a prerequisite. Consequently, you would not rely on your working income for survival, as you should already possess a substantial amount of assets sufficient to cover your daily expenses, hobbies, entertainment, etc. In this scenario, income replacement (temporary insurance coverage) is not of huge importance. Instead, you will require permanent insurance coverage to mitigate future medical expenses, healthcare costs, and the expenses associated with alternative medication.

You can read part 2 of this chapter here, where we cover the topic of lifetime coverage.

At Havend, if we are found to have oversold you, we have put in place a Money Back Guarantee (MBG) scheme, so you can trust that we will always prioritise your interests first. Unprecedented in Singapore, learn more about our Money Back Guarantee scheme here.