How much insurance coverage do you really need and what policies should you get?

We know — or at least have been told — that life insurance is important, and that part of responsible adulting is getting the proper amount of insurance coverage.

But it's not that simple. How much, and what type of insurance to get varies from individual to individual.

Here's the crux: to know how much insurance cover you need to get, you must first understand what types of plans are available, and what each of them does.

Let's start by taking a look at four common types of insurance policies you've likely come across.

Insurance policy cheat sheet - types of plans and what they do

Type of insurance	Primary purpose
Life insurance	Financial protection for your dependants
Medical insurance	Pays for medical treatment and hospital bills
Critical illness insurance	Provides funds in case of serious illness
Personal accident insurance	Provides funds in case of accidental death

As shown in the table above, each of these four types of insurance policies fulfils an important — but distinct — function. They aren't all equal.

In general, we can categorise these insurance plans into two categories: must-haves, and good-to-haves.

Still, this is just a general guide. You should closely evaluate your own needs to determine what insurance plans you should get.

Must-haves - life insurance, medical insurance

Life insurance

The most basic of insurance plans, life insurance pays out the sum assured upon the death or total and permanent disability of the life assured.

In other words, if you buy a life insurance policy that covers you for $1 million, you (or more accurately, your estate) will receive $1 million in the event of your death.

Note: Insurance benefits that trigger upon death are also triggered upon total and permanent disability. For brevity, we will only be mentioning death from this point onwards.

Because you will only get your insurance payout upon death, life insurance is of no use to you. However, it can be very helpful to your dependents, who have now lost the financial support you were providing as a breadwinner.

Why we consider life insurance a must-have is because of the high cost of living in Singapore. Should a parent with young children pass away, the surviving parent will likely face financial hardship as a result.

Does this mean that life insurance is less important for those who do not have dependents?

Well, you yourself may become dependent, if you happen to become paraplegic or disabled in some way. In this case, a life insurance payout will be useful in supporting your living expenses.

Singaporeans are also enrolled into CareShield Life, which provides lifelong income for the disabled. Don't forget to take this into consideration when planning your own life insurance needs.

How much life insurance should you get?

As a general rule, you should aim to cover your dependent's financial needs until it is no longer needed. That means, for children, you should aim to cover their basic living expenses until they turn 21, and for the elderly, until death.

So for example, if you have two children, aged two and three, and the cost of bringing them up is S$10,000 per year per kid, you will want to have $10,000 x 2 kids x 19 years = $380,000 worth of coverage.

Because life insurance premiums go up with age, you may find trying to secure sufficient coverage costly, especially if you have kids late in life. There are two options you can choose:

• Lower the sum assured of your life insurance policy for more manageable premiums.
• Purchase term life insurance instead of whole life insurance. Term life costs a lot less while offering the same level of insurance coverage. However, a term life policy does not accumulate cash value over time, which means you will only receive the sum assured and nothing more. A whole life policy, on the other hand, accumulates cash value over time, which can boost the total amount paid out by your policy.

Medical insurance

The other must-have insurance is medical insurance, and the good news is, all Singaporeans already have it.

Yep, that’s what your CPF MediSave account is for — to pay for your MediShield Life policy, which provides basic healthcare and medical insurance coverage within Singapore.

Should you need to have medical treatment or undergo a hospital stay, the majority of your medical expenses will be covered by your MediShield Life policy.

MediShield Life is tuned to cover medical expenses in public hospitals for Class B2 and Class C wards. If you elect for treatment in a higher class ward, or a private hospital, you will need to foot a larger out-of-pocket bill.

You can lower your cash outlay by extending your MediShield Life coverage to include Class A/B1 and private hospitals by purchasing an Integrated Shield Plan (IP), offered in partnership with private insurers.

You can use your MediSave to pay for your IP premiums, but only up to a certain quota. Once this quota is reached, you’ll have to pay the remainder in cash. As you get older, your IP premiums will rise accordingly, which means you’ll have to pay a larger cash sum as time goes on.

Okay, but since we already have basic medical coverage in the form of MediShield Life, why is medical insurance still a must-have?

Well, as helpful as MediShield Life is, the realities of government-funded healthcare means the scheme can really only cover basic needs. Purchasing an IP provides you with more options which could prove useful in a crisis.

How much medical insurance should you get?

As summarised in this handy table, different providers offer different selection of benefits in their respective IPs. It's a good idea to survey what's on offer and decide what benefits you want to have.

Beyond that, you should also balance between affordability and ward class, as IP premiums rise as you age — especially once you hit your 40s.

Good-to-haves: Critical illness insurance, personal accident insurance

We consider critical illness insurance and personal accident to be good-to-haves.

This is because these two types of policies are more situational, compared to life insurance and medical insurance. Everybody dies, but not everyone dies of cancer, or in a traffic accident.

These two policies only pay out under their respective triggering events, providing additional financial resources during times of crisis.

For critical illness plans, you will receive the sum assured upon a confirmed medical diagnosis of any of the serious diseases covered under the policy. Some policies may also offer early payouts, such as when early stage cancer is detected.

Personal accident plans pay out only in the case of accidental death, but there may be specific instances (such as war and acts of God) that may not be covered. Some policies may offer double indemnity (i.e. paying out twice the sum assured) for specific accidents, such as when using public transport.

How much critical illness coverage should you get?

Your medical plan should cover the costs of your treatment, which leaves your critical illness plan to make up for any shortfalls or extra expenses, including during rehabilitation.

Hence, a good rule is to aim for six to 12 months of living expenses, which will allow you to take time off from work as you recuperate or seek follow-up treatments such as physiotherapy or counselling.

How much personal accident coverage should you get?

Personal accident coverage can be used to boost your total insurance payout, especially for those who are on the road a lot. Hence, you should take your life insurance coverage into consideration when choosing how much personal accident cover to get.

However, should your life policy be triggered due to non-accident causes, you will not receive your personal accident benefits, so be wary of overweighting into your personal accident plan.

Instead of purchasing a separate personal accident plan, attaching personal accident benefits as a rider will often be more cost effective.

How do you know when you’re paying too much for insurance?

Insurance can get expensive pretty quickly, especially as you get older, which is when you become more likely to need insurance coverage.

If you're struggling to keep up with your insurance premiums, you're definitely paying way too much for insurance, and should consider making adjustments, such as switching to term life, or downgrading your IP from a Private Hospital plan to a Class A plan.

There's no point stressing yourself out trying to attain the level of insurance coverage you think you'll need. Just go with what your budget allows, start with the essentials, and build up your coverage as you go along.

However, on the flip side, don't avoid purchasing insurance because you think you can't afford it. Remember, during a crisis, having some insurance is better than no insurance at all.

Average cost of insurance in Singapore

Now that you have a better idea of the insurance plans you need, the next step is to start budgeting for them. Find out how much medical insurance plans cost on average, and what you can expect to pay for term life insurance plans.

This article was first published in ValueChampion.

ALSO READ: How to get the most out of your Integrated Shield Plan