By Ben Fok
Every year in July, I review my financial plan to check if I am on track towards my financial goals. As I was reviewing my life insurance coverage this year, I realised that today's environment is highly unpredictable compared to that 10 years ago.
Today, my job requires me to travel around the region for at least a fortnight every month. Though air travel is generally safe, frequent travelling exposes me to an increased probability of a mishap. In addition, being in a foreign country means I am exposed to the threat of terrorism and unexpected occurrences.
My two teenage children are still in school and both will go on to tertiary education in a couple of years. Even though I have an education plan for them, a catastrophic event or another financial crisis could drain my assets and destroy the best of my investment plans.
Hence, I decided to bump up my insurance budget and expand my life insurance cover by an additional $1 million of term insurance for 15 years. This is in addition to the $1 million cover that I already have. My annual premiums amount to about $10,000 per year as the $2 million cover comes from both term and whole life plans.
The virtues of life insurance are obvious. By paying a premium to the insurer, I get to enjoy the coverage as it will step in to meet its obligations should anything untoward happen to me. Most importantly, I know that all my family's financial needs are well taken care of.
When I shared this with my friends, most of them commented that buying insurance at 47 years of age is just too late. Well, the life insurance industry has evolved over time and there are now more options available to people like me. In recent years, it has become increasingly popular for life insurance firms to launch new, innovative term insurance policies. In addition, they are more willing to accept larger sums insured. Previously, this was not the case.
Some of my friends also commented that the extra insurance premium paid will reduce personal funds that might be otherwise available for additional investments. For example, if $3,300 is invested every year for 15 years, at an annual growth rate of 7 per cent, I could have accumulated $83,000.
However, I take an opposing view. By paying $3,300 a year, should premature death occur in those 15 years, my family will be better off, with a guaranteed $1 million worth of death benefit. So there is a trade-off between putting off insurance and investing your money.
But let me be very clear about the role of insurance in personal financial planning. Insurance serves purely as a protection tool.
When an underwriter looks at your insurance proposal, your health condition is a major criterion to evaluate. My experience tells me that by the time you hit 45 years of age, or even earlier, some health symptoms may appear and will hinder your insurance application.
For example, common health problems such as hypertension, diabetes and high cholesterol levels may cause the insurer to request a higher premium. In my case, my health has always been good, except for mild hypertension. If I were to wait till next year, who knows what will happen to my health.
The next factor is age. As we grow older, insurance premiums will naturally become more expensive, so I would want to buy insurance as soon as possible.
According to my calculation for a particular insurance product, the premiums at age 47 would cost me $3,300 per year. If I wait till age 50, the premium will be 45 per cent higher. That is why it is important for you to increase your coverage when you are younger.
Some may ask why I bought a $1 million insurance for a 15-year term. Well, let's assume a person earns $100,000 per annum. In 10 years' time he will earn $1 million. Essentially, he is protecting 10 years of future income that would otherwise vanish if premature death occurs.
In 15 years' time, I will be 62 years old. By then, both of my children will be in their late 20s and should be financially independent.
Initially, I thought of adding a critical illness rider, which would increase my premium from $3,300 to $7,600. I chose not to add this rider because I already have $400,000 of critical illness cover from my existing policies and that should be sufficient.
Some of my friends asked why I did not choose a whole life plan. Well, I would have to pay more for it compared to term insurance for the same $1 million coverage. I did not like the idea of paying more and paying that sum even after retirement. My belief is: Before you choose whole life insurance, make sure you have the means to support your premiums after retirement.
When we choose insurance, we want it to be cost-effective, and we should select the coverage that helps protect our family's long-term financial interests. Determining which insurance coverage would be most beneficial to you requires:
- Knowledge of your needs;
- An appreciation for uncertainty;
- An understanding of the best product alternatives; and
- Complete objectivity in the decision-making process.
These factors are important when you are considering buying insurance. If you do your homework, finding the right insurance won't be difficult.
The writer is the chief executive officer of Grandtag Financial Consultancy and he can be reached at email@example.com. The financial strategy referred in this article may not be suitable for all readers.
This article was first published in The Straits Times.