A common theme I hear a lot from budget conscious clients is the reluctance to pay too much for insurance. In fact, some go as far as telling me that they don't need so much coverage. One interesting data is that most of these encounters are with people who are in their late 30s to early 40s and might have more income to protect.
So as much as we all know, we want the best coverages for ourselves, not all of us are willing to pay for it. Sometimes, it's simply out of our budgets because we decide to buy insurance too late. How then should we go about this balance of managing our costs to coverage?
Some known but often overlooked truths
For starters, most of us can afford to pay for our 'expensive' insurance. Sum assureds are usually calculated based on the assets you want to protect. Premiums are usually a fraction of the sum assured. Most middle income households have savings. Those who don't often spend it on wants not needs. In other words, all I'm saying is we simply need to evaluate if this coverage is important for us to pay for it over maybe a daily cup of bubble tea/starbucks coffee or grab ride home.
Be objective in your evaluation process
Let's assume you prefer to sacrifice some coverage over your luxuries in life. The evaluation process is then a simple question of how much do you need the full coverage versus how much of the risk can you stomach on your own.
1. How much do you need to protect your full income?
Take for instance, I know a Malaysian couple earning high income. They save 80% of their earnings in Singapore and they told me their cost of living in Malaysia would be even lower. Should something unfortunate happen, they will just go back to their kampong to retire early. Do they see the need to cover their full income? Not really, because they have already amassed substantial savings which can last them for a long enough period. They are also confident in generating extra income if they really need to stop working through their substantial savings. Then do they want to cover their income in full? In their case, after a long deliberation process, they did. Why not when the cost of insurance is a small cost compared to them spending their wealth?
Now, if you aren't like this couple and you don't have a lot of savings, you need to consider how important is it to protect your income. If you have children, you also need to consider how important is it to leave a sum of funds behind for them should anything unfortunate happen to your life. Will you need to borrow money after 1 year of not working? How about 3 years? Or 5 years? A typical rule of thumb for critical illness cover for instance is 5 years because that is the expected duration of treatment and patients may need to stop work during the recuperation phase.
2. How much of your savings are you prepared to use to fund your living expenses if you decide to self-insure partially?
Ultimately, if you make a conscious decision to discount your coverage, you are essentially saying you are prepared to fund some of the additional expenses on your own. So what is this amount that you are prepared to sink into this need (if required) without regret?
Imagine a person earning $8000/month and suddenly gets diagnosed with a major state of muscular dystrophy (a type of disease that damage your muscles overtime). He/she can't go back to work while trying to recover. The family would suddenly lose a $8K/month income provider. Assuming this person only bought a $200K CI coverage, then this person would need to make up for the shortfall with savings if he/she takes more than 2 years to get well.
Of course, one point of argument is that people will not spend all the income. This is just a simplified illustration. Even if the expenses are 50%, there might still be additional monies needed to fund extra expenses which will eat into the savings. For instance, you might be taking MRT and bus all your life. When you have difficulty to move about, then perhaps you need to take grab or taxi to your medical checkups. Also, the illness might drag on beyond the expected recovery period or might lead to a revision of job role, then a downgrade in remuneration needs to be accounted for.
So if a person does not have substantial savings, then a higher coverage becomes even more important.
3. How long would you take to save up the money again if you use the funds during your recovery?
If one chooses to compromise on the coverage they get, then naturally if something unforeseen happens, they would need to supplement their chosen payout with savings. After spending their savings, they need to accumulate the funds again.
For example, John earns $5000 and bought a CI coverage of $100,000. His monthly expenses is $4000 each month. That is 80% of his pay. When stroke occurred and half his body was paralyzed, he couldn't go back to work. It took him a total of 4 years with physiotherapy to get well. As his payout was only a $100K, he funded the balance of his expenses through his savings. Now that he got well, John needs to continue on his accumulation journey so that he can also save up for his retirement. To accumulate back to his original savings, John would take 1 year 7 months assuming the same remuneration when he resumes work.
On the other hand, Ram earns $10,000/month. His monthly expenses is $7000 which is 70% of his pay. Thinking he has 400K set aside as savings, he only bought a $100K in coverage. Thus when cancer happened, he decided to take a break as his body did not react well to chemotherapy. He had to use $236,000 of his own money to fund his expenditure after his $100K payout was used up. If he is lucky to find a similar job after he recovers, he will still take 2 years to re-accumulate back to his original $400K savings.
Now, depending on when CI happens, how long the unemployment lasts and if a similar remuneration could be commanded after recovery, the impact could have severe consequences. Imagine Ram fell ill when he is near retirement age, he might not have the time luxury to accumulate his savings again. Then how would he retire?
4. Do you expect your assets to grow?
A common point raised by clients is that they would cover less now because they only want to spend a certain figure on insurance and expect to cover more when their financial situation increase.
From my experience, if a person deems their coverage costly now, unless their financial situation increase multi-folds, it will always be deemed expensive. Firstly, the person will be older when they purchase the new coverage. Secondly if you become richer, you need a bigger sum assured which can be heftier in cost too. On the flip side, if you 'suffer' more at the start to cover a greater sum assured at the back, you might actually get a better value for your protection coverage.
For instance, a 30 year old, male, non smoker might pay $2370.65/year for a death, total permanent disability cover of $1million and a early critical illness (ECI) & advance critical (Adv CI) illness coverage of $250K each till age 65. Sometimes large sum assured also carries discounts.
It is less costly as compared to the same guy getting a $300K death and total permanent disability cover with $100K ECI and Adv CI cover first at age 30 costing $1272.75 and then adding on the balance $700K death & TPD and $150K CI coverage later at 35. The additional coverage will cost $2132.30 for the same coverage duration. This means to cover till age 65 of an eventual $1mil and $500K total CI cover, it will now cost the same guy $3405.05/year.
Of course, the figures are illustrative but you get the idea of the cost increase when you discount your coverage when you are much younger. There's a high chance that since man finds the initial 1 mil cover at $2370.65 expensive, he is going to complain that $700K cover is even more 'not worth it' for $2132.30 on top of the initial premiums he is paying.
This is why, it is important to ask yourself if you will regret discounting your coverage later on before making the decision today.
Important rules of thumb to consider
Insurance is bought with health not wealth
I've also seen people opting for the basic hospitalization enhancement without rider and not wanting to pay for additional protection plans when they are healthy. Later in their mid thirties, they get serious about protection coverage because they are starting a family only to have developed some medical conditions. For those with minor conditions, it's not a big issue. For the more serious conditions, it will lead to exclusions or loading.
This also leads to my point that if people like to claim they will increase their coverage as their financial situation improves, then are they also confident they won't have medical issues when they are finally ready to buy? The recent Careshield Life supplement has given me a huge eye-opener when I realised how many 30-40 year olds have some form of medical issue (big or small). This really gives food for thought to everyone.
Insurance is costlier as you get older
Another fact of insurance is that the older one gets, the more costly premiums become. I've seen a case of client opting for group term insurance earlier and then think he will add on to his coverage as he gets older and when he has a child. The client is already in his late 30s. While it may be argued that client is saving money now, will he be willing to pay for the inflated premiums later on? Chances are, after seeing the prices, many people gets put off. Which leads back to the consideration, how much of your own money are you willing to use to fund unforeseen needs should something unfortunate happen.
Summary
In short, the idea of discounting your own insurance coverage is simply a balance between what you are willing to finance with your savings versus what amount of risk you are willing to outsource to an insurer. As long as you can live with that decision, it's fine. The issue only arises if one person is unrealistically optimistic about their health and financial situation only to regret later on when the real need happens.
To help you with this evaluation, ask yourself these key questions:
How much protection do you really need?
How much are you willing to pay / can you afford to pay for your protection if you need to use your own money?
How long would you take to save up the same amount of money if you use it for unforeseen situations?
How much impact on your retirement will this be if you need to utilize a portion or all of the funds?
As your resources change, what is the additional asset amount you need to protect?
Would you be willing to pay for it?
Would you be pink of health when you want to add on to your insurance?
Can you afford the risk of self insurance if you were sick by the time you are financially ready to buy more coverage?
Are you mentally prepared to pay higher premiums for coverage since you definitely will be older later on?
Every decision we make carries with it a benefit and a consequence. As long as we can take ownership of our decisions, there's no right or wrong way to make these decisions.
If you would like to re-look at your insurance coverage, please speak with a trusted advisor. You can also drop me a message if you would like me to help you with it. 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. Like my page or Follow me on Instagram if you would like to read more of such articles and see more educational videos. 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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