In the days of plenty, we might have been willing to pay more just to enjoy the warm fuzzy feeling of being amply insured. But thanks to COVID-19, a lot of us have had to tighten our belts, leading us to evaluate recurring expenses such as insurance premiums.
How do you tell if you’re overspending on your insurance and need to cut back, though? Let’s have a look at what’s reasonable to spend on insurance.
How much of your income should you spend on insurance?
As a general rule of thumb, financial advisors tend to advise that you spend 3% to 10% of your take-home income (not counting CPF deductions) on protection-only insurance policies.
This is just a guideline for the average person. For instance, if you are secretly a billionaire but your household is thrifty and spends very modestly, you can get away with spending a much smaller fraction of your income on insurance.
If insurance is your only form of investment or savings, you might want to spend more, as the 3% to 10% applies to protection-only policies and does not include hybrid plans like endowment plans or Investment-Linked Plans.
Now, if you’re spending significantly more than 3% to 10% of your take-home pay on insurance, it may be time to compare your premiums against the market rates.
Here’s a look at the sample costs for a young adult in Singapore.
How much should health insurance cost in Singapore?
Hospitalisation insurance is considered essential in Singapore. If you don’t have any other form of insurance, this is the first type you should consider. This type of plan will cover most of your medical costs if you get hospitalised.
For Singaporeans, the most cost-effective type of health insurance plan available is the Integrated Shield Plan (IP), offered by 7 insurers in Singapore. Some of the premium would be payable by MediSave; however, as you get older, be prepared to fork out more of the premium in cash.
Turns out, you’ve got more to worry about than wrinkles as you age. Hospitalisation insurance premiums rise with age, so you’ll find yourself paying more each time you move up into a new age bracket.
Sample premium for health insurance
Let’s calculate the premiums a 30-year-old Singapore citizen can expect to pay.
As a 30-year-old Singapore citizen, you can expect to pay a total premium of about $400+ a year for an IP entitling you to stays in Class B1 wards, about $450 a year for Class A, and about $600+ per year for private hospital coverage.
The above premiums would be payable in CPF MediSave as long as it doesn’t burst the annual limit for your age group.
If opting for a co-payment rider, you’ll need to pay for it in cash. Budget another $100 per year for Class B1, $200 per year for Class A, or $600+ per year for private hospital plans.
How to lower health insurance premiums
If you only have the default MediShield Life and want to upgrade to an IP, you can compare plans across the 7 IP insurers for a cost-effective option. However, there is no guarantee that your premiums will remain low forever.
Choose your provider carefully, as you will be stuck with that insurer once you develop any medical conditions. If you switch to a new insurer, they won’t cover any pre-existing health conditions.
If you are unwilling to risk that, you can consider switching from a private hospital plan to a public one. Many Singaporeans opt for the former for greater peace of mind, but it IS a lot more expensive than even a Class A IP.
How much should term life insurance cost in Singapore?
There are many types of hybrid products offering life insurance protection, but for the purposes of this article we’ll focus on term life insurance, ie. a protection-only plan that protects you for the duration of the plan’s term, and does not have any cash value or investment component.
Life insurance is essential if you have dependents — this could be kids, a non-working spouse, parents, a sugar baby, etc. who depend on you financially. Your life insurance plan will pay out a lump sum to replace your income if you pass away.
Sample premium for term insurance
A 30-year-old male non-smoker with a $500,000 sum assured and a policy term of 20 years should be prepared to pay about $22 to $35 per month for term life insurance.
Some examples of popular term insurance policies below:
Term life insurance premiums are pegged to the age at which you sign up for the plan. Subsequently, the premium will stay the same for the term of your plan. So, if you have a 20-year plan, you will pay the same premiums for 20 years.
After the term has expired, if you wish to renew your plan, your premium will be updated based on your age at the time of renewal.
How to lower term insurance premiums
The best way to keep costs down is to buy term life insurance as early as possible. Since the premiums are calculated based on age, buying early means you can lock down a cheap rate for the entire term.
Don’t forget to comparison-shop if you don’t have an insurance policy already! You can get free term insurance quotes and comparison across multiple insurers on MoneySmart.
To keep your long-term costs down, try to avoid signing up for a term that’s too short for your needs. That can save you from higher premiums come renewal time.
If you are just looking for basic life insurance coverage, consider buying direct purchase life insurance, which is cheaper and can be purchased without having to first speak to an agent. You can learn more about direct purchase insurance here.
How much should critical illness insurance cost?
Critical illness insurance is a good-to-have form of insurance that you should consider if you already have health insurance and (for those with dependents) life insurance. This type of insurance usually offers a lump sum payout if you get diagnosed with a serious illness.
You can get critical illness protection by purchasing critical illness rider for your life insurance policy. However, getting a critical illness payout may then render your entire policy void.
For this reason, plenty of Singaporeans opt to buy standalone critical illness insurance plans. There are a few permutations, all priced differently:
- Cancer insurance
- “Big 3” (cancer, stroke, heart attack) insurance
- Standard (late-stage) critical illness insurance
- Early stage critical illness insurance
- Multi-payout critical illness insurance
Sample premium for critical illness insurance
A 30-year-old male can expect to pay about $20 to $80 per month for a stand-alone standard critical illness plan, offering a single payout of $200,000 upon late-stage diagnosis.
But this can vary greatly depending on the type of plan and coverage, so don’t forget to compare among a few insurers before you commit.
How to lower critical illness insurance premiums
If your critical illness insurance is too expensive to maintain, you may consider cancer insurance or “Big 3” insurance, which can be cheaper.
The obvious disadvantage is that they are limited to cancer, possibly resulting in a morbid worst case scenario where you end up actually hoping to get diagnosed with cancer as opposed to the 37 diseases covered by a more comprehensive critical illness insurance plan.
Alternatively, you may want to look into a term life insurance policy with critical illness rider. This also tends to be more affordable.
But note that you’ll only be covered for the term of your choice. If you don’t get a serious illness (or die) during that period, then you don’t get a payout — tough luck if you get sick in old age.
What about everything else?
Apart from the types of insurance mentioned above, you might due to your circumstances wish to or be forced to buy the following types of insurance.
Third party motor insurance is compulsory if you own a vehicle. Price varies depending on factors like your age, when you got your licence and your vehicle model (ah beng car models pay more). Car insurance will cost at least $1,200 for a year in your first year of driving.
Protects your home and belongings against horrible happenings like fire and exploding, splattering sewage. Nice to have if you own a home. Budget about $40 to $100+ a year for $20,000 to $50,000 worth of coverage.
Personal accident insurance
Covers you if you die or become permanently disabled in an accident. This is an important one if you’re a gig worker or have a high-risk occupation. Budget about $80 to $180 a year for this.
Pays an allowance if you become disabled. You can get a plan that ties in with the government scheme CareShield Life; a 30-year-old male should budget at least $200 a year.
In total, those of you who have your lives in order and actually own things like cars and homes, budget about $1,500 to $2,500 a year for insurance extras like the above.
What to do if you’re overspending on insurance?
It’s not exactly light reading, but try to muster the courage to review your policies periodically, either alone or with a financial planner.
Next, it’s time to Marie Kondo your insurance coverage, forgetting for a second that it’s highly unlikely that any of your policies spark joy. Pick out the policies that are no longer cost-effective and consider surrendering or switching them out with cheaper plans.
Focus on what you really need — the protection, rather than other factors that you got swayed into signing up for by a glib agent.
For instance, if you’re holding on to a whole life insurance plan with low coverage, you might want to consider surrendering it and buying term insurance with higher coverage.
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