Tuesday, November 20, 2007

Why do we need insurance?

First of all, need to clarify upfront that I'm not related to the insurance industry, and all these views is based on my layman understanding of insurance. I'm not really in the position to advise anyone on insurance since I'm providing the view from a layman perspective. I would encourage you to approach an independent financial adviser if you wish to purchase insurance. They should be able to explain it in much more detail, and the coverage needed.

Why do we need insurance and why is it related to retirement planning? I'm actually not talking about the normal term or life insurance here. It's the health insurance that I'm actually targeting. To me (subjective), in order of the most important insurance:
  1. H&S (Includes medishield)
  2. Critical Illness
  3. Disability

In retirement planning, you will be formulating a plan to achieve a certain amount by the time you retire. Health is one risk that you should hedge because this risk is quite likely to happen (Insurance is all about hedging risks). Short hospitalization bills for small illnesses come up to slightly < $2,000 for a B1 ward. There might also be some illnesses that require you to be hospitalized quite regularly, and its recurring. Do not think that all illnesses can be cured completely. Big hospitalization bills... I will not mention here, but many people have lost their fortune over medical bills, especially over cancer. Critical illness is less likely to happen to you, but if it does, you can be sure its going to be a big drain on your financial resources. Some of the required treatments might also not be covered under the H&S insurance. Disability insurance is more to ensure that you have an income if you're unfortunately seriously injured and you're unable to work.

Some people might ask... I have a retirement portfolio. Why don't I draw on this retirement portfolio to fund my health needs? Retirement portfolio in reality, is really a long term plan. To generate returns, it's always the battle of risks vs rewards. High risk does not necessarily equate to high returns. However, over the long run (20, 30 years), the risks will become manageable (not disappear).

Withdrawing from the retirement portfolio will affect the returns substantially because the fundamental tool that the portfolio will be using is compound interest. Take away some of the capital, then there's not much you can compound on. If the economy is down, withdrawing from the portfolio will be like buying at a high price, and selling at a low price. Being sick is an expensive affair. It's even worse even if its a critical illness. This will adversely affect your retirement plan.

When you're near retirement age, it's also more likely that you will be sick more frequently. I'm sure no one wants to save for their retirement, to only spend it all on hospital bills. If you spend it all on hospital bills, what are you going to live on?

Even if you're not gunning for a retirement portfolio, I will still encourage that one should at the very least, get a H&S policy. In Singapore terms, that would be the Medishield. Currently, most of the insurers in Singapore have launched the as-charged Medishield. Meaning that once you pay a deductible (fixed) and a co-insurance %, the insurer will foot the rest of the bill, provided your illness is not part of the exclusion list. The Medishield (government or private) can be paid using our CPF. There are other riders on top of the shields that provide cash allowances per day, waiver of co-insurance, etc etc. However, the riders will require you to pay by cash. For more information, please approach your adviser or the respective insurers' websites.

My focus of this post is more on highlighting that being sick, can and will affect your retirement. Don't think that you're now strong and healthy, and nothing will happen to you. Things always happen when no one expects it to. This possibility becomes higher when you get older.

Next post on my retirement planning series, I will be talking on how to fund our retirement.

1 comment:

Patricia Briggs said...

This is interesting, as retirement planning is one of the most common plan people prepare for, to have the assurance that when they reach their retirement, they could still enjoy their life at its best. And I agree -- illness and disability can affect it as a whole. That’s why a lot of people advise that you make sure that provisions are also available for those before purchasing an insurance plan. Thanks for sharing.

Patricia Briggs @ Source Brokerage

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