Protection – why do you need it?

What is Protection?
The two most critical types of personal insurance I discuss with clients are life cover and critical illness cover. The former pays a lump sum to named beneficiaries on your death, and the latter pays a single lump sum or multiple lump sums to you if you experience one of the standard list of critical illnesses (as defined by the Life Insurance Association in Singapore).

You can think of each as effectively being insurance for your salary, as your salary will stop:

• Permanently in the event of your untimely death, and
• For at least an extended period if you suffer a critical illness

Do I need Life or Critical Illness cover?
The decision on which main type of policy to consider is basically down to whether you have any financial dependents (e.g. spouse, children, aged parents); people who are reliant on your salary, besides yourself. If you do, then consider taking out life cover. If you don’t, then consider taking out critical illness cover. It’s worth noting that life policies can include a critical illness element (called a “rider” in policy jargon) and, usefully, a “total and permanent disability” element (also a “rider”), so that the policy can pay out not only in case of your untimely death, but also, potentially, prior to that.

Common mistakes to avoid in choosing a policy:
1. Coverage period – Given that these policies are effectively covering you and/or your dependents for loss of your salary, it generally makes little sense to extend cover many years into your retirement (e.g. up to age 100).

2. Sum assured – The amount of cover that you and your dependents actually need requires some thought. Simply calculating this based on your full salary up until retirement is probably excessive when calculating the need for life cover, so it isbest to go into some detail with a financial advisor, so as to come to a sensible conclusion on what is really required.

3. Procrastination – The younger you are when you take out a policy, the lower the premiums (which will stay constant for the term you’ve chosen e.g. monthly over 25 years) will be.

Conclusion
The protection of your dependents and yourself should be the #1 priority for anyone with an interest in their own personal financial well-being, and certainly ahead of investments. With the right advice and the right policy, tailored to your actual needs, you’ll find that peace of mind can be surprisingly affordable.

Written by Michael Davidson
This article aims to provide information, it does not constitute financial advice, nor should it be relied upon as such. You should speak to a financial advisor regarding your circumstances before making a financial commitment. Global Financial Consultants Pte Ltd is a Licensed Financial Advisor and is regulated by the Monetary Authority of Singapore. MAS License number FA100035-3