What Is Insurance?

What is insurance?
Insurance is a risk management tool. It transfers risks to a third party who would pay the insured an agreed sum of money in the event of unforeseen circumstances.

What kind of risks?
The following are some of the main risks we will be discussing:

  1. Risk of being critically ill
  2. Risk of early/premature death
  3. Risk of total permanent disability or temporary disability.

These risks translate to a loss of income, huge medical bills and inability to realize your economic value. (Economic value refers to a person’s potential income till his/her retirement age.)

What does it mean to me?
It depends on your priority and the stage of life you are in. Some questions you might want to ask yourself include:

  1. if I were to be critically ill, would I be still be able work? Would I be a burden to my family?
  2. If I were to pass on early, can my family take care of themselves? Can my wife or loved one suffer financial hardship?

You may have to take time to think, for the next 5-10 years what kind of risks would be more pertinent that you would need to prepare for right now.

For example: A 35 year old family man with 2 children aged 3 and 6 would be concerned with all 3 risks above. This is because, he does not want to be a financial burden in the event of critical illness or disability but to be able to provide for himself his daily and medical needs. He would also be concerned that in the event of pre-mature death, what could happen to his family. (e.g. would his children able to complete tertiary education? Would his wife able to provide financially for the children?)

Another example: A lady who is in her 50s or 60s may wish to use insurance as a tool for wealth creation for legacy planning.

Insurance as a risk management tools
In Singapore context, an individual should consider the following factors for personal risk management.

Risk MGT Chart

How much coverage should I have?
“So how much coverage do I need?” That’s a very good question. There are no fixed rules on how much coverage you need. It depends on how much you may need in the event when such “unfortunate” thing happens. For example, in the event of critical illness, it’s unlikely that you would be able to continue working. However, you still need money for your daily needs and ongoing treatment. The question is how much would you want to provide for yourself in the following areas?

  1. Your daily needs such as food, transport, etc.
  2. Your medical bills and outpatient consultation.
  3. Any other you would like to set aside?

Hence, each individual’s insurance portfolio is unique and has to be custom-made to meet the needs.
In summary, insurance is a great tool to protect against unforeseen circumstances and give you a peace of mind. Every insurance portfolio is different and can be customized to fit one’s needs. It is good to get yourself and/or your children insured early when you are in the pink of health.

The golden rule is that: You buy insurance when you do not need it; but when you need it, you cannot buy it.

Speak to your financial advisor early to customize an insurance portfolio so that when you need it, you have it.