Wealth Management Pyramid

Wealth Foundation

At the base of the pyramid are financial plans that should be in place regardless of the situation. These fundamental plans include diverse forms of insurance, emergency funds and short-term savings which intend to address your short -term financial needs and goals. With this, you can answer the following questions: 

  1. What happens to my family when I die? Will my children still be able to go to college even if I’m not there?
  2. What happens to my income if I get disabled? Will I still be able to maintain this kind of lifestyle that I currently have when I get unemployed?
  3. What if my house gets burned down by fire?
  4. Is my cash flow sufficient enough to cover our family’s fixed expenses?
  5. Am I on-time in paying my credit card and other bills?

These questions naturally evoke emotions in people and if they strike you at the very core, that is because personal finance has an emotional dimension to it. But let’s face the reality. Anyone who aspires to be a functioning member of the society requires a strong foundation in the wealth building process.

Here’s a checklist that you should have:

HEALTH

INSURANCE

AUTO

INSURANCE

HOME

INSURANCE

DISABILITY

INCOME

INSURANCE

LIFE

INSURANCE

EMERGENCY

FUND

WILL

Health Insurance

Health insurance is the most basic and essential financial product that you must have, regardless of demographics. 

Why is it important to ensure that you have enough health insurance coverage?

Health insurance helps to cover your medical expenses and prevents you and your family from suffering a financial loss as a result of an accident, illness or disability.

It also finances you with an income when you are unable to work due to your sickness.  

 

There are typically 5 main types of health insurance policies:

Medical Insurance

Under this type of policy, there are 3 types of medical insurance plans.
1. Shield Plans (MediShield Life and Integrated Shield Plans), which are funded by the Government
2. Global Medical Insurance. A comprehensive international health insurance plan.
3. Private Medical Insurance (Individual & Group).

Hospitalised

Hospital Cash Insurance

The Hospital Cash Insurance basically provides you with a fixed amount of cash payouts for each day you are hospitalised.
However, the total amount paid under this policy may be more or less than your actual medical expenses.

Early-stage to Critical Stage Critical Illness Insurance

The objective of this plan is for income replacement purposes where you will receive a one-time lump sum to help you with your expenses and reduce your financial burden when you are diagnosed with an early to critical stage illness.

Disability Income Insurance

This policy helps to your financial loss which allows you to receive a fixed amount each month if you are unable to work due to an accident or illness.

Long-Term Care or Severe Disability Insurance

This policy provides you a fixed monthly sum of money to cover your expenses of medical costs when you are severely disabled.

Understanding Your Health Insurance Costs

Most of us know that we have to pay for our own medical healthcare fees and sometimes the health insurance company shares the costs with us.

However, the biggest question is this:

When and how much do we have to pay each time?

To answer this question, you will have to understand what you are paying for your health insurance policies. You may have come across insurance terms such as Premiums, Deductibles, Co-Insurance, and Out-of-the-Pocket maximum. All of these basic terms have an effect on how much you are to pay for your healthcare cost.

What is Premiums?

Premium is where policyholders are required to pay their insurer an amount of money for an insurance policy. Some policyholders are allowed to pay their premium in instalments (monthly or semi-annually) to keep the health insurance plan going.

If the policyholder fails to pay their premium, it may result in the cancellation of the policy and a loss of coverage.

What is Co-Insurance?

Co-insurance is basically the amount, generally expressed as a percentage, an insured must pay against a claim after the deductible amount is satisfied.

What is Out-Of-Pocket Maximum?

Out-of-pocket maximum is the most you have to pay for covered medical services in a year. After you spends the out-of-pocket maximum amount on deductibles, and coinsurance for healthcare services, the insurance company will cover every dollar of your health services that is covered in the policy. 

What is Deductibles?

Deductible is the initial amount of money you have to pay for your medical expenses before your health insurance makes a payout and shares the cost with you.

The stage of your policy use also affects how much you have to pay for your medical bills.

STAGE 1

STAGE 2

STAGE 3

  • At the beginning of the year of the policy.
  • Policyholders would be required to pay for most of the healthcare services until they reach the deductible amount. 
  • Usually in the middle of the policy year.
  • Policyholders have to pay a percentage of the cost which is termed as co-insurance after fulfilling the deductible amount, and the insurance company will pay the rest.
  • Usually at the end of the policy year.
  • Policyholders have to only pay for the co-insurance and the rest of the medical bill would be paid by the insurance company.

Understanding what you are paying for your health insurance plan and how much you are being covered for is important so that you know how much you can claim from your insurer. By acquiring this knowledge, you will know the amount of deductible and co-insurance you are comfortable to undertake yourself with.

Health Insurance Fraud

Health insurance fraud is one reason why premiums of healthcare insurance kept rising over time. Health insurance fraud or Provider Fraud, is the most prevalent type of health insurance fraud where medical experts and healthcare providers falsify documents and commit the fraudulent act for their own financial gains and benefits.

The most common fraud methods used by healthcare professionals are:

  • Billing for services that were not rendered
  • Misrepresenting the service provided
  • “Upcoding” : charging for a more expensive service than what was actually provided to the patient.

How do you protect yourself and ensure that you are not one of the victims of healthcare insurance fraud?

Don’t be afraid to ask questions to your doctor and make sure to keep track of your records regularly. By keeping track of your records, it tells the insured what the doctor is billing for. Also, check for the discrepancy in the bill if there is suspicion of fraudulent behaviour by healthcare providers.

If you notice any sign of fraud, you should immediately alert your insurer about the discrepancy.

Auto Insurance

Auto insurance protects you against medical and liability costs when you are involved in a car accident. 

3 main types of car insurance policies: 

1.  Third Party Policy

The most basic policy which covers only the costs associated with the damages to the property and death or injuries by the other parties involved in the accident. 

2. Third Party, Fire and Theft Policy

Expands on the basic coverage by providing additional protection by providing losses due to accidental fires and theft.

3. Comprehensive Policy

This is the most commonly bought policy in Singapore. It covers everything including third party liabilities and fire or theft, losses and damages done to the policyholder as well as the vehicle, passenger  and belongings. 

Home Insurance

When a claim is made on these incidents, the insurer is only subjected to pay up to the maximum policy limit.

Home insurance policy also provides liability coverage against accidents in the home or on the property. However, the policy has a liability limit, which determines the amount of coverage you has, should an unfortunate incident occur.

In an event that a claim is made, the liability limit stipulates the percentage of the coverage amount that would go towards replacing or repairing the damage to the property structures, personal belongings, and the costs to live somewhere else while the property is being recovered.

Home insurance is a form of property insurance that covers losses and damages your house and assets in the event of a disaster or accident. It can also provide liability protection for accidents that occur at your home.

What does Home Insurance cover?

It usually covers 5 kinds of incidents on the insured property:

  1. Dwelling coverage: Covers the interior damage and exterior damage to the physical structure of your home.
  2. Personal Property: Covers your personal belongings, furniture, electronics, or other possessions that are damaged inside your home
  3. Personal Accident: Covers your family member(s) who suffered bodily injury, death, or permanent disablement caused by accidental means sustained whilst at your insured dwelling.
  4. Liability: Covers the personal property of guests who visit your home and the medical costs that they incurred from the accident while being on your property.
  5. Loss of use: covers your cost of living and transportation expenses while your home is being recovered if it becomes too damaged that it’s uninhabitable. 

Not only does Homeowners Insurance protect your home and belongings from accidents, it is also a necessity to receive a mortgage.

HOME INSURANCE VS. MORTGAGE INSURANCE

Home insurance is sometimes confused with mortgage insurance.

Mortgage insurance protects your lender in the event that you default on your mortgage loan.

If your property is mortgaged to a bank, the bank would require you to purchase a Mortgage Interest Policy (MIP) to protect the bank’s financial interest for the amount of loan outstanding.

In the event of a failure in servicing the loan due to the damage of the mortgaged home, the bank can make a claim on the MIP and you will remain liable for the outstanding property loan amount.

HOMEOWNERS INSURANCE VS. FIRE INSURANCE

These two insurance policies covers two different sets of items in your home.  

FIRE INSURANCE

In the event of a fire outbreak at your home, the fire insurance would protect and covers the cost of rebuilding the structural condition of your home, such as fittings, and the core structure such as floors, walls or pillars.

Other possible events that policy also covers:
  • Lightning
  • Riot & Strike
  • Bursting or overflowing of water tanks, apparatus and pipes
  • Earthquake, wind and storm
  • Explosion
  • Impact damage
  • Malicious damage
  • Smoke damage
  • Sprinkler damage

HOME INSURANCE

Home insurance is a supplement to Fire insurance which protects what is in your home, in addition to the property’s structure. It includes furnishings, decorations, and your own personal belongings. 

2 types of home insurance policy:

1. Insured peril
This policy is only usable for highly specific disasters such as fires and burst pipes. As such, the policyholders would not be able to claim for any damages or loss caused by other factors like thief or break-ins.

2. All-risk home insurance
This is a comprehensive home insurance policy which covers all types of disasters and tends to be more expensive as compared to the insured peril.  

Disability Income Insurance

Disability income insurance pays you for the loss of income due to an accident or illness. The policy helps to ease your financial loss, but will not completely replace your income before the accident or illness. 

What are the key features of Disabilty Income Insurance?
  • Pays you a fixed amount of monthly benefit when you are unable to work due to an illness or accident.
  • However, it only pays up to only 80% of your average monthly salary.
  • The monthly income may be paid for up to 5 or 10 years, or until you reach 60 or 65 years old.
  • Payment will stop or reduce once you are fit to work again
1 in 2

1 in 2 people will become disabled before for an extended period of time

The common belief of people becoming disabled is due to sustaining a serious injury from accidents. However, the most common cause of disability is actually illness. When that happens, you would be unfit to work, and you won’t be able to earn a stable income monthly.

OTHER TYPES OF

DISABILITY INSURANCE  

Long Term Care Insurance

Provides a fixed monthly payout to cover your caretaking and nursing needs. It is not for income replacement purposes.

Unlike Disability Income Insurance which requires Salary to purchase, Long Term Care Insurance does not require someone to earn a stable salary.

Therefore, if you are jobless or a homemaker, you can buy the Long Term Care Insurance. 

Total and Permanent Disability Insurance

Embedded within a life insurance or endowment plan.

 

A payout of Total Permanent Disability only happens when you cannot work in any occupation for a continuous of 6 months or when you suffer the loss of a pair of limbs (above wrist or ankle).

 

In such a situation, you will receive a lump sum payout, usually equivalent to the death benefit payout. The policy then will be terminated after the payout. 

 

The coverage of Total Permanent Disability is different from the coverage under disability income insurance. Disability income insurance provides monthly payouts as long as you are unable to do your current job due to a disability, either temporary or permanent, until a certain age.

 

On the other hand, TPD is only given out, in a lump sum, when it is a permanent disability. 

Other Types Of Disability Coverage under Personal Accident

It generally covers the loss of a finger or toe or a 3rd-degree burn. Usually, the injury is not that severe as compared to the other 3 policies.

COST OF DISABILITY INCOME INSURANCE

Factors influencing the final premium amount of Disability Income Insurance are: 

Age

Policy premiums for Disability Income Insurance can be as low as less than 1% or up to a maximum of 3%.
Some of the insurance plans could price the premium according to the age band.

Gender

Generally, disability income rates for women are higher than males. This may be attributed to pregnancy, childbirth, and higher rates of depression or other pre-existing medical conditions.

Smoke or non-smoker

Smokers are expected to pay as much as 25% more for the same amount of protection as a non-smoker as there is a higher incidence of smoking-related illnesses. 

Life Insurance

Life insurance replaces income and this is significant to protect those who depend on you. 

Being covered under life insurance, your insurer will guarantee the payment of a death benefit to the beneficiaries you named in the contract when you pass on. 

HOW MUCH LIFE INSURANCE DO YOU EXACTLY NEED?

There are 3 types of approach you can use to calculate the amount of coverage you need for life insurance.

HUMAN LIFE APPROACH

RULE-OF-THUMB APPROACH

NEEDS APPROACH

Determines your life insurance needs on the basis of your income, financial assets, expenses, savings, and liabilities. 

Human life value is the present value of all future income that you could expect to earn for your family until retirement. It indicates the economic loss your family would suffer in the event of your early demise. 

 

It is a quick method where you multiply your current annual income by a factor between 10 to 15.

For example, if you earn $50,000 annually, you would require about $500,000 ($50,000 x 10) to $750,000 ($50,000 x 15) worth of life insurance benefits in the event of death. 

Used to calculate your life insurance needs based on several calculations: 

How to compute coverage needed using needs approach?
  1. Sum of all of your short-term needs. Such as outstanding debts and emergency expenses.
  2. Sum of your long-term debts and obligations such as mortgage loans, using the future value of money equation
  3. Total family living expenses such as food and utility bills, using the future value of money equation
  4. Calculate what resources you have currently, to meet your needs. Such as savings, stocks, and existing life insurance policies. 

Formula 

Life insurance needs = short-term needs + long-term needs + maintenance (living) expenses – resources.

TYPES OF LIFE INSURANCE PRODUCTS

WHOLE LIFE INSURANCE

Refers to whole life and endowment policies and investment-linked policies.

A whole life insurance plan provides you with protection and investment components. It helps you with accumulating of cash value ,

TERM INSURANCE

Term Insurance offers protection coverage for a fixed period of time without any investment feature. It lasts for a certain number of years, then ends. Normally 10,20, or 30 years.

ENDOWMENT

A savings plan to help you save regularly to meet a specific financial goal, with life coverage over a period of time. Most people purchase such plan to save for children’s’ education, or to build up a pool of savings over a fixed term for retirement.

Part of your premiums goes towards insurance coverage, while the rest is invested and subject to risk 

INVESTMENT-LINKED INSURANCE

It has both life insurance coverage and investment components. Investment-linked insurance provides protection in the event of death or total and permanent disability. 

Premiums paid are used to pay for unit trusts of your choice. Some of the units purchased are then sold to pay for insurance and other charges, while the rest remain invested. 

UNIVERSAL LIFE INSURANCE

It provides life insurance coverage as well as a savings or investment component. Although it may seem like a whole life insurance, it’s different as it offers a higher degree of flexibility. 

There are two main components in a Universal Life insurance: cost of insurance and the savings/investment element. 

The insurance element only provides death coverage – when you pass on, your family will get a multiple of what you put in. The savings/insurance element (differ between the type of plans) could also be a supplement to your retirement need.

It is important for you to remember that the amount of life insurance coverage you need, will keep changing, depending on your life stage, your income, family situation etc. These changes usually occur at different stages of life.  It is, therefore, vital for you to change and check your human life value regularly.  

Emergency Fund

Emergency Fund is a sum of money that you set aside in the event of a financial emergency for accidents, sudden injury, or an unexpected loss of income. It is meant to be used for covering expensive costs incurred by unpredictable life events such as unanticipated loss of employment and urgent medical emergencies.

The primary objective of keeping an emergency fund is to improve your financial security by creating a safety net to meet emergency expenses. An emergency fund should cover at least 6 months’ worth of expenses. 

By ensuring that you have set aside an amount of money for emergency use allows you to live for a few months in the event of you losing your job or if an unforeseen situation happens that costs a fair chunk of money to cover.

Will

Writing a will is essential if you have dependents such as young children or old parents. A will is a written document that sets out your instructions and wishes on how you want your assets such as money, property estate and possession to be distributed after your death. 

In planning or drafting your will, is it important to present a draft that captures the instructions and objectives of you comprehensively. The terms of the Will must also be practical so that its execution can be carried out unambiguously when the time comes. 

These are the many intangible aspects that could be addressed in a Will but are often overlooked.

These are some of the aspects:

  1. Does the Will express statements of your visions and legacy values for your family members?
  2. Does the Will reflect careful planning, thoughts and details on how provisions are made for your family?
  3. Is there equity, reasonable or consistent giving in the manner in which you had gone about in dividing up your estate to your beneficiaries? 
  4. Will the giving cause any resentment, hostility or conducts among the beneficiaries?
  5. Are there elements in the giving that might cause your beneficiaries to be distracted from achieving qualifications and purpose in their lives?
  6. Are the virtues of responsible and prudent living, continuous hard work and care and love for your family members stated in the Will?
  7. Are there elements of giving that embrace your religious beliefs, your generosity towards charity and doing social good?
  8. Have you consider it in a holistic view?
  9. Does it work hand-in-hand with other legal instruments like Advanced Medical Directive, Lasting Power of Attorney and other legal agreements?
  10. Have you drafted your letter of wishes, letter of intent, asset & liability inventory and even have a family office set up?

When all of the above aspects are clearly addressed in your estate planning, you will draw utmost satisfaction, fulfilment and peace of mind, by leaving behind a meaningful legacy with your will.