How I keep my insurance expenses low

I must admit that insurance is one of the things that I have been very slack at managing over the past few years. In my first few years of work, I bought an investment-linked policy from a friend who was an insurance agent in Prudential. When my father passed away, I realised that the hospital bills were very hefty. Not to mention the costs involved in organising a funeral.

Last month, I checked my investment-linked policy and found that after so many years, the policy was incurring a loss. Having concluded that insurers are not good good investors, I decided to surrender the policy and switch to term insurance instead while I build an investment portfolio for myself.

After all, the only one who cares about your money, is YOU.

My insurance philosophy

Insurance companies are not non-profit organisations. They need to stay profitable and keep their shareholders happy. Like-wise, insurance agents are faced with a conflict where the insurance plan that pays the highest commission, may not necessary be the best insurance plan for their clients. I spent a few weeks meeting insurance agents from different insurance companies to understand the types of insurance plans they offer and their benefits (I had to determine the weaknesses myself because no salesman would tell you the flaws of their products).

Self-insurance is a method of managing risk by setting aside a pool of money to be used if an unexpected loss occurs. Theoretically, one can self-insure against any type of loss. However, in practice, most people choose to buy insurance against potentially large, infrequent losses.

I decided to adopt a self-insured approach by maintaining an adequate self-insurance reserve fund. The self-insurance reserve fund is essentially a stash of cash that’s set aside for me to absorb some of the risks from the insurance company in exchange for paying lesser premiums. For example, this fund can come in handy when I need to pay for doctor visits and minor medical procedures. I don’t foresee the need to tap into the reserve fund anytime soon because my employer has a corporate medical and dental insurance for all employees so I can always use the corporate medical card to see the doctor.

To start the reserve fund going, I will be injecting the money that I get for surrendering my investment-linked policy so that it has a substantial amount to start with. I intend to add $128 (just a magic number that I came up with) every month so it could grow into something substantial when I retire and when there’s a high likelihood that I may need to tap into the reserve fund.

I still intend to take up health and life insurance plans to let the insurance company absorb the risks of a major illness or life-changing accident which could easily cost a six figure sum and wipe out my savings in an instant. I make it a point to avoid insurance plans that are packaged with savings and investment elements because these plans tend to charge higher premiums (and higher commissions for insurance agents) and produce below-average results. My investment-linked policy is an excellent example.

What’s my biggest worry?

My family. As the main breadwinner in the family, most of our liabilities lie with me. If something were to happen to me, my family will then have to shoulder my liabilities. What if I don’t die? That will make matters worse as they would then have to manage the cost of taking care of me.

How much do I insure myself?

My previous investment-linked policy costed me $128 per month and I was very comfortable with paying this amount monthly. However, the sum assured was only $100,000. I felt that the figure is very inadequate at this time in my life when I am busting my ass in the corporate rat race.

Here is a structure of my insurance portfolio built based on a time x income scenario:

  • Death/Total Permanent Disability – 7.5 years of annual income
  • Critical Illnesses (CI) – 5.5 years of annual income
  • Early Stage of CI – 1 year of annual income
  • Accidental Death – 5 years of annual income

After building my insurance portfolio structure, I went out and spoke to a few insurance agents for quotes. Eventually, I settled down on these options.

Death/Total Permanent Disability

  • SAF Group Term insurance for $300,000 sum assured – $38.40 per month
  • NTUC Income i-Term insurance for $200,000 sum assured – $24.70 per month

Critical Illnesses (CI)

  • SAF Group Term Living Care insurance for $300,000 sum assured – $30 per month

Early Stage of CI

  • SAF Group Term Living Care Plus insurance for $100,000 sum assured – $10 per month

Accidental Death

  • SAF Group Term Personal Accident insurance for $300,000 sum assured – $13.38 per month

Despite getting an increased coverage, my total insurance expense is reduced to $116.48. On the whole, I am very satisfied with this outcome.

It’s not over yet

Insurance is planned for the long term and I will have to re-examine my insurance portfolio periodically to see if any changes to their policies are necessary. The critical timing that I must re-examine my insurance portfolio is at 65 years old because that is when my SAF Group Term insurance premiums will skyrocket every year thereafter.

What is passive income to you?

What is passive income to you?

In my circle of friends, passive income has very little meaning as most of them focus on generating active income in a corporate rat race to the top. I on the other hand, have no interest in being the leader of the pack. I’m a little lazy in that sense. Instead, I focus on building passive income so that when I retire, the money would continue rolling in even when I spent the day lazing at the beach.

Passive income is an income received on a regular basis, with little effort required to maintain it.

Here are two passive income sources that I have today.

Stock Dividends

A hot topic this year in some of the online forum communities that I participate in is stock dividends. It’s starting to become a trend where people want to build a portfolio of stocks with only one goal – receiving dividends every year.

Receiving dividends from investments sound great but it’s also important to invest in a company that is able to grow its business. Take Singapore Reinsurance for example. If you had invested in them, you would have received a decent 5% dividend each year which is great. But on the other hand, the stock price has been stagnant growth for the last 5 years so apart from dividends, your money has not really grown.

In my tiny Income Portfolio, I own stocks of Challenger and Singapore Post and I’ve had them for many years now so I’ve made a decent capital gain on these 2 stocks on top of the regular dividends that I’ve been receiving.

Moving forward, I plan to set up an Index Fund Portfolio consisting of Equities and Bonds ETFs and they should also generate a stable dividend every year as well.

Side Income

In 2007, I started a sole proprietorship webhosting business. It all started when a friend of mine referred me to his friend who wanted to set up a website for her online store. So I paid for a reseller webhosting account and hosted her website for her.

At that time, the profits for webhosting were good and there wasn’t much startup capital needed for a reseller. Through referrals, I made good money operating this business as a side income.

Fast forward to 2014 and the webhosting industry is saturated as anyone with a computer can set up a webhosting business. Most of my top-tier clients are gone and I’ve also started transitioning my reseller webhosting business model to an affiliate webhosting business model where I help my clients set up their websites with a webhosting business and in return, I get a commission each time my clients renew their subscription.

My clients get quality service and I further reduce my operating expenses. I still keep my sole proprietorship business name for digital marketing consulting projects.

Are you generating any passive income today?

Where do you see yourself at the age of 50?

Will you be a successful C-level Executive leading the pack in a major corporation? A contented family person who’s watching his or her grandchildren grow up? Or a wanderer travelling the world, leaving nothing but footprints?

In my world, I see myself as a person who has the option of remaining employed if I want to, or travel the world with nothing but a backpack. Marriage as of now is not of major importance to me. I’m happy to do things by myself and spend more time with friends and family.

My investment portfolio would have grown substantially since I have been diligently investing at the age of 30 and generating a comfortable passive income through annual dividends and capital gains.

Self-sufficiency will play major role when I’m 50 as I strive to maintain a low monthly expense that will be paid with passive income. Perhaps having a garden of my own, growing crops that I can harvest for consumption.

Renting my home for a stable monthly income is also an option if I intend to travel the world, and I may need a property agent to manage the tenant while I’m away.

What will you be doing at the age of 50?

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