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:
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
Critical Illnesses (CI)
Early Stage of CI
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.