It's early Q4 and I've wrapped up my business goals for the year. As a result, I'm spending more time to reflect on 2021 and what are some of the takeaways I'd like to share with consumers.
This article is meant to be a 3 part series for young adults but due to the length of the article, I decided to slice it up into singular articles. For this article, I thought it'll be a great idea to offer a different perspective on insurance coverage and why future proofing it might be financially attractive.
Why Future Proof Your Coverage?
This is especially the case if you know you are projected to earn a high income.
What exactly does future proofing of your coverage mean?
Essentially, when we talk about protection planning, a common rule of thumb we use to plan how much coverage we need is 9-10 times your annual earnings as basic life cover and sufficient coverage to provide for family needs during an expected recovery period of 5 years in the event of critical illness (CI).
Now, based on the above rationale, it's highly plausible that most young adults buy just enough coverage for themselves at their current life stage. Often, this coverage amount would be smaller because young adults would begin at the lower rungs of their career salary ladders.
So traditionally, in order to protect future higher income, clients would add on coverage when the salary and expenses significantly increase. Often, clients would be much older for this to happen. Which might potentially lead to 2 concerns:
Higher premiums
Pre-existing medical conditions start to surface
Case Study
Imagine James bought his insurance the moment he started working in his first job. He decided on a simple term insurance to cover his income earning years with a coverage that follows the recommended coverage amounts. Let's assume he picked this particular insurer whose premium cost him $1,364.10/year for the proposed coverage.
Now James is a very capable staff and after a series of job hops and promotions, he now earns $10,000 a month at the age of 38. Naturally his coverage needs would also increase drastically. Assuming, we follow the same rule of thumb and James increases his coverage...
His total cost would be $4,058.65 (at the point of writing this article) if he takes up the solution from this insurer. Of course this assumes he is still healthy. If he happens to have developed some health issues like high cholesterol, he might have exclusions or loading depending on his health issue severity.
Now, there are other permutations worth considering including replacing his smaller term plan with a new term plan (potentially cheaper) with higher coverage if James is in clean bill of health. However, for the simplicity of this article, we will just add on coverage.
If James decides to future proof his income because his job prospects are predictable and he projects his future income to be $10,000 between 35-40, he might have chosen to pay for a higher coverage in his 20s. The limit of higher coverage James would be allowed to buy would still be subjected to financial underwriting (insurers have a formula to determine what is a reasonable coverage based on your income as you are not supposed to profit from insurance).
In doing so, his yearly premium would have dropped to $2,614.95 for the duration of his term coverage. Now here's the consideration, would he have spent more in total buying just enough first and adding on later or would he have spent more paying for a higher premium at the beginning?
If James bought enough and add on coverage later, he would have spent $127,316.85 if nothing happens to him at 65. On the other hand, if James bought a higher coverage from the beginning, he would have spent $104,598 if nothing happens to him at 65.
So based on this case study example, James would have saved money on his total premiums if he bought a higher coverage earlier. Also, James would be more assured of coverage certainty as he would be younger and hopefully healthier. Lastly, James would have a more predictable cashflow as a spike in his later years when he takes on more commitment might be more financially stressful.
Key Considerations
So why don't everyone do so? Based on experience, usually people are only offered to buy enough. In the rare cases when future proofing of income is suggested, people are usually reluctant to spend more on insurance at their current life stage. Some may even argue they may not earn so much in future. Hence they rather pay more when that time comes. Sometimes, this concern is valid. Other times, it's just emotional due to the reluctance to pay more for insurance.
One benefit that is often missed out when people future proof their coverage is how this higher coverage can help clients to save money on critical illness premium waivers or be protected for financial commitments especially when they commit to other wealth accumulation solutions. It also provides added cover when you are a home owner. You buy mortgage insurance to protect your debt if you die but you don't buy extra critical illness cover when you buy a home right?
Will people even bother to buy extra coverage on top of what they originally had? Frankly, if you only earn $2,500/month, even if you can't keep your full time job, you can still substitute that income quite easily with ad-hoc jobs. However, if you lose a $10,000/month income, it is not so easily replaceable and that's when people want to protect it.
Summary
In short, the purpose of this article is to play devil's advocate and provide a different perspective to the norm. There's more than one way to skin a cat and there's more than one way to plan your coverage.
After reading this article, you might be keen to have a discussion on protection planning with me. You can reach me by dropping me a message. Be sure to share the article if you feel this information is helpful. You will enable a lot more people to learn about protection planning.
About Janice
I specialize in portfolio optimization (ensuring you get maximum value for every dollar you put in) and retirement planning. I am also building a team of financial advisors who are committed to help responsible individuals attain their goals without misallocating their resources. Do reach out if you would like to explore a career with me.
Clients look for me primarily to outsource their retirement planning needs so that they can focus on other aspects of life that interests them. Many of whom are very good in earning their incomes in their respective professions and wish to ensure their monies continue to work harder while they focus on what they are good at. Refer to client testimonials here.
I've helped many clients who are referred to me reduce the costs they are paying for their insurance or help provide solutions when they deem they are stuck with huge commitments bought when they were younger but unsuitable for their present life stages. You can reach me at 94313076 or my social media accounts on Facebook and Instagram.
Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.
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