Importance of Insurance in Financial Planning

Saving for the future alone is only one aspect of financial planning; wealth accumulation alone will not make you financially stable. If you want to manifest stability in your finances, it’s also important to ensure that your assets are protected and that you are insured. 

Insurance is basically many people coming together to pool their monies in a common fund, and in the event of unfortunate circumstances, the participants will be able to receive a certain amount of money based on their input into the common fund. 

As we advance as a society, the common fund is invested to grow over time, risk tables are formed to account for the insurance cost amongst different ages and it becomes more systematic, structured, and regulated; and that’s what we refer to as insurance contracts nowadays.

Different Aspects of Insurance Coverage

On a personal side, insurance plans cover a wide range of conditions, from Death, Total and Permanent Disability (as a base), with riders that cover Critical Illness, Early Critical Illness. There is also specialized insurance covering Hospitalisation & Surgical, Personal Accident, Long-Term Care, Income Replacement, etc. 

Further to this, insurance is also available to protect your assets, with the most common being mandatory motor insurance to cover your vehicle. Other insurance would be home mortgage insurance, home insurance, travel insurance, and other various commercial insurance coverage.

Basically, you will have to decide whether the risk of a loss would impact you heavier than paying cents on the dollar for insurance coverage; with plain vanilla term insurance, your dollar could provide 100 to 1000x in coverage.

Mistake #1: Not Having Insurance

Most people, for a variety of reasons (mostly because they do not want to pay for something intangible, or that they do not believe in insurance), end up not having insurance. To the extent that our government has to make Medishield Life and Careshield Life mandatory for all Singaporeans. 

End of the day, if you belong to this category, then you’ll need to re-assess your beliefs, why would so many smart and capable people out there believe in insurance, such that even the government has to step in to provide some basic infrastructure for its citizens? 

Also, do measure the risk: Between the risk of paying for something that might not be necessary versus the risk of suffering catastrophic impact on your finances, which mistake would you rather make? 

Mistake #2: Not Knowing What You Have

Over time, after meeting many clients, we have noticed many clients not knowing what they have. Some are over-covered, some are paying for very expensive policies that are not competitive (even between term plans, the difference can be up to 40% and personal accident plans from general insurers tend to be at least 20% more competitive than life insurer). 

Some might look like they have a lot of coverage, but in actuality, it only covers one aspect and is grossly insufficient. However, the worst portfolios are those with overlapping coverage that doesn’t result in multiple claims, a gross waste of their funds! Insurance policies cost real money so when you own too many policies or buy ones you are not likely to use, you are basically throwing money away!

Do review your portfolio and make sense of it, and if you find it too tedious, get someone who is well recommended and endorsed by your friends to make it easier for you. It might take a bit of time, but it will definitely serve you. I’m sure you wouldn’t want to be unable to claim, after paying years of premium due to some misunderstanding on your part.

Furthermore, through an insurance portfolio review, you would also determine which policies if you could optimize your finances. 

Mistake #3: Not Being Served by an Independent Financial Advisor 

Would you want to visit a doctor who has tie-ups and represent a certain drug company? Similarly, it would be prudent to seek advice from an independent financial advisor, as they represent many companies, and the likelihood of them having your back is much higher due to the perspective they have to hold before they are willing to be an independent financial advisory representative. 

Speaking with a personal finance professional will help you get a good understanding of your insurance portfolio.