We Asked 3 financial advisors On What Insurance Should Look Like For A Young Working Adult

I “risked my life” for this article.

My initial plan to get some valuable insights from Financial Consultants proved to be more challenging than I expected.

Of the agents, I reached out to,

• many insisted on a coffee instead of writing me a good piece of content.
• One of which states that his time is probably more valuable than mine and writing an educational piece reaps lesser returns.
  

A percentage of these Financial Consultants and Financial Institutions might have stopped caring about the well-being of consumers from an educational point of view. Yet, I am definitely fortunate enough to meet my fair share of agents who believe in helping Singaporeans make better personal financial decisions.

Definitely a good start, and below are some of such. Thanks, guys!

Natalie Lim

Financial Consultant, PACESETTERS ORGANISATION (under Prudential)

I would recommend young working adults to take 10- 20% of their income for their wealth protection.

Hospitalisation

Hospitalisation coverage is a must-have in young working adult’s financial portfolio. It’s essential to get yourself covered, when you are young and in a clean state of health, so there won’t be any exclusion or loading fee.

Medical expenses in Singapore is on the rise, and hospital bill can be really hefty. It can easily wipe out someone’s annual income or entire saving. Don’t let your hard earned money to be wiped out by hospital bill, transfer a risk that you can’t bear to an insurer that can!

Life insurance

Buy term invest the rest. Insurance can make the hard times easier and the good times better.

While everyone wants to go to heaven, nobody wants to die. However, death is inevitable. Life insurance not only protects your loved ones from suffering financially when you passed on, it is your income replacement, in any event when you are unable to work and support yourself and your family.

You are your greatest asset! The lump sum payout would help you to maintain your standard of living and pay your bills.

You do not have to wait till you get a dependant or property mortgage. It’s more affordable to get your coverage when you are in your 20s to 30s, and then look to increase your coverage by then.

Savings

Every working adult has a financial goal, be it a wedding, housing, retirement and future kid’s education that would require a lump sum of money.

If you are risk averse and want to start saving money. Getting an endowment is one of the many possible ways to kick-start your saving to meet some of your financial goals and helps you to hedge against inflation.

You don’t have to monitor or worry about the market, basically, you just let your money roll and grow till maturity.

Some plans also have the flexibility to let you take out money in times of needs or ease you during a career transition or simply to treat yourself.

It is always advisable to discuss with your financial consultant about your saving objective and let them recommend you options, be it an endowment plan or other products that suit your needs.

Hu Zhouyang

Senior Financial Consultant, Advisors Alliance Group

Financial planning has two aspects of it

• risk management
• wealth accumulation.

Allow me to share a bit more on risk management. For some people, including myself in the past, have little idea of insurance planning. I commonly see someone getting a $200 per month endowment plan thinking that he is well insured. This may not be so, and we all know the reasons why:

• Endowment plans provide little death coverage or no death coverage.
  Upon death, insurance company merely return the premium that the person had paid. 
• Endowment plans itself provides no critical illness coverage.
  In the event when critical illness strikes, the plan pays out nothing. The plan becomes a liability. (assuming no CI waiver rider where future premiums are waived when a CI is diagnosed is attached).

What should a proper risk management plan look like?

The kind of plan depends on individual preference. There are mainly 3 types of insurance plans available.

• Whole Life Plan
• Term Plan
• Investment-linked plan.

In my opinion, whichever plan I  get is not as important as how much should I insure myself with.

Apart from integrated shield plan which I think everyone should get before any life insurance is considered, which life plan to get should depend on the “why”.

Different people have different “whys” in which they want to get insured for. If we know the “why”, the amount is easier to derive.

For example:

• The calculation for a person that gets insured simply because he/she does not want to be a burden the family differs from a person that wants to provide for the family even after he/she is no longer around.
• The same can be said for a person with parents to take care vs someone whose both his/her parents passed on.

Hence, it is important to engage a financial consultant to help structure insurance planning with their tools available to suit your needs.

For illustration, we assume the scenario where the young working adults are responsible, parents are still around and want to provide even when they are no longer around.

For death coverage, we will want to make sure that all our outstanding liabilities are taken care of. The reason is that liabilities will not be waived upon death and our loved ones may suffer paying our debts. 

On top of that, we should also calculate based on how much we want to give to our loved ones. If my current pay is $60,000/year and I want to provide to my loved ones for the next 10 years.

• A simple calculation will be to take my yearly income and multiply by 10 years.
• That will be roughly $600,000 assuming no liabilities and not take into account inflation and potential income growth as we progress in our career.
• If you wish to take into account all these variables, I will advise you to approach your financial consultant for a more detailed calculation.

For critical illness coverage, we surely do not want to touch our own savings. Especially for people who make their own investments or investment decisions, the last thing we want is to cash out our investments at the inappropriate timing and make a loss. Hence, critical illness planning is crucial. It acts as an emergency cash in the event of critical illness. A simple calculation will be based on our current expenses. When we lose our ability to generate income for the family due to illnesses, our expenses will definitely increase. For example, if my current expenses are $2,000/month, and I want to be taken care at least for the next 10 years. Then the amount to be insured will be roughly $2,000 x 2 x 12 months x 10 years. That will be roughly $500,000. This sum of money will act as income replacement in the event of illnesses. Please also note that some of the critical illness plans cover for late-stage CI and some plans covers for early stage all the way to late stage CI. Please consult your financial consultant as insurance terms may be confusing to read and comprehend.

In order to hit $600,000 death sum assured and $500,000 Critical illness coverage, it may cost you some money if you were to get from purely whole life plan or investment-linked plan. Hence, it is important to approach your financial consultant as they will structure your portfolio according to the budget you are comfortable with. It may be a mixture of whole life plans and term plans or investment-linked plans and term plans. The variation really depends on individual needs.

Things to do after getting your policies

• Nomination of policies.
  The last thing we want is that after purchasing the insurance policies, the insurance company is not sure who to pass the money to in the event that we are no longer around. An unnominated insurance policy belongs to the probable asset will go to the estate of the deceased and will distribute according to the Intestate Law. The process of getting the money is long, tedious and most importantly, we do not have the say in who we want to pass the money to. Doing up insurance nomination will solve the problem and it is cost-free. A nominated insurance policy is a non–probable asset and hence the money will be paid directly to the beneficiaries. Our CPF funds can be nominated as well. However, do note that CPF nomination will be revoked upon marriage.  There are basically two types of nomination forms which are Revocable nomination and Irrevocable nomination. You are highly advised to consult your financial planner before doing up nomination, especially irrevocable nomination. 
• The Lasting Power of Attorney
  Lasting Power of Attorney (LPA) is a legal document that allows us (donor) to appoint one or more person to be “done”. In the event that we lose mental capacity, we will not be able to handle our daily welfare as well as our own finances. The donee will then handle our personal welfare as well as our finances. In the event that LPA is not done up, no one is able to touch our assets until the court appoints someone as the deputy. Applying for a deputy is a long and costly process. By doing LPA, we potentially help our loved ones save thousands of dollars, the agony of going through all the unnecessary paper works and most importantly removing any chance that our loved ones dispute against each other about who should handle our welfare and finances.

There are two types of LPA forms. Form 1 and Form 2. Form 1 is the general type of form which most of us will use. Form 2 is the one with more flexibility and customization. To certify our LPA, we need a medical practitioner accredited by the Public Guardian, a practising lawyer, or a registered psychiatrist. For detailed information, you can consult your financial consultant or visit www.publicguardian.gov.sg.

When all these are completed, you will be in a much better position than many other young adults as a young working adult for the risk management section. Do take note that as we progress to the later part of our lives. There are several things we need to do. For example, estate planning. Will and trust are important tools for estate planning that we need to do up after marriage. Hence, its always recommended to consult your financial consultant regularly and most importantly at different milestones of your life. 

Disclaimer: Above opinions are personal, it does not represent my organisation nor my agency.   

Jonathan Chua

Personal Wealth Manager, AIA Singapore