How do I decide what types of insurance coverage I need?

Is your insurance coverage giving you the security, freedom and the provision that you need for your future goals? Or have you got your insurance premium payment on autopilot, so you aren't really conscious about what you've spent on or when you should buy another insurance plan?

On Money and Me, Michelle Martin spoke with Christopher Tan, CEO of Providend, to break down the concept of insurance and help you think through the strategies to tailor your insurance coverage to your needs.

Michelle Martin: What is your view on the purpose of insurance?

Christopher Tan: The whole purpose for insurance is for protection. My view is that insurance is an expense, not a saving, so when you buy insurance, buy as much as you need, but try to pay as little as you can.

There are many people who use insurance to save money or invest, but it is actually a very expensive way to do it and there are plenty of better options.

Michelle: What is the matrix in deciding what kind of insurance is best for me?

Christopher: Unfortunately many people start off with buying the insurance product(s) first before thinking about whether they really need it. Instead, one should ask themselves two key questions before deciding what insurance products to buy: How long do you need the insurance coverage for? and How much insurance coverage do you need?

Michelle: So, does this come down to how long you need coverage in terms of your age, where your starting point is versus your end point?

Christopher: The key question is, 'Do you buy it for just a period or are you buying it for your entire life?'. It also depends on the type of coverage.

(1) Death coverage

The purpose of buying death coverage is to replace your income loss upon your unfortunate demise. The question to ask yourself if you need this coverage is 'Do I have dependents?'.

If you don't have dependents, there is no need for death coverage because you are not going to impact anyone financially when you pass on, unless you want to give [the insurance payout] as a gift.

If you have dependents, you need death coverage until your youngest dependent becomes independent, or when you are retired, whichever is later. When your dependent becomes independent, they will not be affected by your loss of income due to death, and when you are retired, you are no longer earning an income. So, this coverage is a temporary need.

(2) Disability Coverage

The purpose is to replace income loss due to disability. Similar to 'Death Coverage' this is a temporary need until your youngest dependent becomes independent, or when you're retired.

(3) Coverage for Medical Crisis

There are 2 financial impacts:

• The purpose is to replace loss of income, for instance when you can't work anymore, due to a medical crisis. This is a temporary need until your youngest dependent becomes independent, or when you're retired, whichever is later.
• If you're buying insurance to pay off medical expenses, then you will need it for as long as you live.

If you are buying insurance to replace income loss, it is a temporary need.

The only insurance that you need permanently is for medical coverage.

Michelle: How does one review the insurance policies which they may already have bought?

Christopher: Firstly, ask yourself if you still need the coverage. For instance, you may be nearing retirement [age] or your children have already grown up, so you no longer need that coverage. If that is the case, you could consider giving up the coverage.

Secondly, if you have done a review and you realised that you may still need the insurance coverage, ask yourself if this coverage is sufficient. If it's insufficient, you may need to increase your coverage. After which, look at whether these policies that you have still meet your needs, otherwise, you may need to consider upgrading your coverage.

Finally, if you need to buy new policies or increase coverage amount, the key question would be to ask yourself if you can afford the premiums, else, you may need to restructure your entire insurance portfolio to give up some plans and replace them with more affordable ones.

So, reviewing your insurance [with your advisor] is very important. We have to decide what we need because we cannot cover all the risks. It doesn't make sense to spend so much money paying for insurance premiums, leaving us with nothing to save towards our longer-term goals and retirement.

The premium for a whole life insurance if much higher than a term insurance, but the coverage is also much lower. That is why we should ask ourselves first, 'How long do I need to this coverage? If I don't need it permanently, then why should I buy a whole life insurance?'.

Michelle: When it comes to what you can do with your insurance policies, can one only consider surrendering or terminating them, or is selling an option?

Christopher: If you have reviewed [your insurance policies] and realise that you don't need your expensive whole life policies but can still afford the premium, I would suggest to retain them because early termination always means you make a loss [in terms of returns]. But, if you don't need your policies anymore, or you cannot cope with the premiums, there are a few options:

Firstly, if you have children, you can consider assigning the policies to them to take over the premium payment. On your unfortunate demise, they will receive the insurance proceeds.

Secondly, you can go to your insurance company and ask them to reduce the sum assured. In this way, you will be able to reduce the premiums. Another way would be to ask for a paid-up policy. The insurance company will calculate the existing cash values that you have accumulated and estimate how much sum assured you can sustain. Basically, your sum assured is reduced, but you can stop paying the premium.

If you don't want to do that or to terminate your policy, you can consider selling it to the secondary market but some people do not prefer this option.

The final option would be to surrender your policy. But, please note that giving up an insurance policy may have serious consequences due to health status changes, so do consult a trusted advisor for a review before deciding to restructure or give up any insurance policies.

To find out how much insurance one needs, listen to the full podcast anywhere and enjoy more features on Awedio: SPH's free digital audio streaming service.

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This article was first published in MONEY FM 89.3.