When is a good time to start looking for insurance for myself and what types of insurance should I prioritise?

A student asked me:

When is a good time to start looking for insurance for myself and what types of insurance should I prioritise?

First of all, it’s important to understand the point of insurance. Insurance is a kind of risk management. The basic idea is that you pay a sum of money (a premium) for financial protection over an uncertainty that could result in a loss of money.

Let me explain. Let’s say you have a beautiful gold necklace that you want to buy from an overseas seller. You paid $10,000 for it and $100 for a super reliable courier service to transport the necklace to you. There is a possibility that the gold necklace could be lost in transit. Either the cargo plane may crash, the package may get stolen during transit at the airport, or the courier van may get hijacked. We don’t know. It’s unlikely but it could very well happen. And if it does, you lose $10,000.

It’s unlikely, but the fact that it could still happen can be rather unsettling. Wouldn’t be great if you can get some peace of mind knowing that if it does get lost, you still can recover your $10,000?

That’s what insurance companies are for! So an actuary (someone who calculates risks and determines how much to charge you) will do the math to decide how much you have to pay for that unlikely event that you do lose it (that will still be profitable for the company). Let’s say it costs you $90 to insure the delivery of the product. So if the gold necklace arrives to your home safe and sound, you only lose $90 and the insurance company profits. And if the gold necklace is lost, you get back your $10,000. Whatever it is, that sum of $10,000 is protected.

This is the main idea behind insurance. When you are buying insurance for yourself, you are insuring on the potential lost of income if you suddenly are unable to work normally due to accident or ill health; or lost of income for the entire family if you pass away before retirement. Or you might want to insure yourself against the potential costs involved in future medical treatments or to offset against the costs of paying for a caretaker.

For starters, you should get insurance to cover for death, accidents, and critical illnesses. The younger you sign up for this, the better, because you get to lock in that same annual price (known as the premium) for the duration of that coverage. The cost of the premium increases with age, so the older you get, the more expensive it will be to enroll.

So sign up early to keep the cost low. Of course, one of the difficulties is if you’re still a student, you’re not working, so you can’t afford. So I’ll say start looking around now and sign up the moment you get a job (I don’t believe in relying on your parents to pay for you).

Now, here’s the thing about insurance. It’s always tempting to want to insure yourself with the highest amount possible. And some unethical insurance agents will try to push you towards that (because the premiums will be higher and they’ll earn more commissions). So you need to ask yourself: what are the financial losses that you want to protect against? In the event of death, you want to at least cover the cost of funeral arrangements. If it’s the against accidents/illnesses that will cause you to lose your ability to function, what’s a reasonable amount of money required to support yourself? There are statistics on the average age where people succumb to certain illnesses that are disabling. So you can use that as a gauge to do a rough calculation.

Now, there’s another issue you need to consider. Some people sign up for the highest coverage thinking that they can pay the premiums forever. But your present spending ability is not an indicator of how much you will be able to spend in the future. If you get retrenched and have many mouths to feed at home, you may not be able to afford the premiums and will have to cancel the insurance coverage (and it’ll cost too much to sign up again). This, by the way, happened to my dad who got retrenched in 1997. He now goes through life with zero insurance coverage.

So be prudent about the coverage and premiums, with considerations about your ability to pay for them in the future.

The last thing I’ll say is: I strongly do not recommend investment-linked insurance policies. It’s a lot cheaper to buy a term insurance and do your own investments than it is to buy an investment-linked insurance policy. You save a loooooooot more money in the long term. The way they market it, it sounds like a really good deal, and it sounds good only because most people don’t know anything about investments, and so they cannot imagine how things can be better. It looks like you’re getting a good deal, but that’s because they’re playing with a psychological trick to make it seem like you’re getting a good deal. But the truth is, you’re not .If you learn how to do the investments yourself, you can make way more money even after deducting the cost of insurance from a term plan. So don’t be lazy. Go learn how to invest. Don’t leave it to an insurance policy to do it for you.

And there are many other issues with investment-linked insurance policies. Many of them will lock the money in for a very long period of time. And if you need to cash out because of some urgent life need, you will lose certain privileges that await you at the end of the policy decades later. So you don’t have the same kind of flexibility as having money parked elsewhere (either in a bank or in shares/bonds). And because the premiums for such investment-linked policies are so much higher, if you find yourself in a financially difficult situation in the future, you will be more inclined to cancel completely and lose your coverage. Term plans are a lot cheaper, and you won’t feel so financially suffocated even in financially difficult times.

Now I’m not the best person to talk to for advice on what exact insurance policies to buy. There are people who are more in the know than I am. For starters, you should find people who are financial advisors not tied to any single insurance company. They are free to show you a range of insurance products from all the insurance companies in Singapore. Use the time to learn from them. And more importantly, don’t feel bad that you have to sign up for something. They are just doing their jobs, and you are just trying to be a sensible customer. You can buy them a drink if you want.

And like I said, be wary of agents who tell you to sign up for the highest coverage possible or who try to scare you about the doom and gloom of death and diseases. You should lodge a complaint about them. And if you find yourself in an unfortunate situation where you got pressured into signing a policy you don’t want, you have up to 12 days to refund the policy behind their backs.