I believe everyone should buy insurance to cover his/her “worst case scenarios” and not just buy because it is likely to happen. In fact, your worst case scenarios are likely to be low probability events and hence, unlikely to occur. But because they are unlikely to occur, most people are unprepared for them (just when you think you are healthy). This causes the impact of such low probability events to have big detrimental effects. Analogous to betting where odds are involved, the payout for the outcome is the highest when the probability of happening is the lowest. If you are not insured against your worst, then you have the pay the most price in the end.
Defining the worst case scenarios
Worst case scenarios can be very subjective and differs from person to person, but there should be some similarities. Defining your worst case scenarios is equivalent to defining your needs, instead of your financial planner defining the needs for you.
For illustration purposes, here are my worst case scenarios:
Scenario 1 – I contracted major illness/disability such that I am not able to work and have to depend on family.
Scenario 2 – I died and my dependents’ financial future becomes uncertain.
Scenario 3 – As a single child, my parents contracted major illness/disability such that their medical costs become a toll on my finances.
Protection against the worst
After defining my worst case scenarios, I should find out what insurance policies are available for protection against such cases:
Scenario 1 – A whole life or a term life policy with critical illness and total permanent disability clauses would be able to compensate for major illness and total permanent disability. It is impossible to cover all illnesses but like what we went through initially, we should cover the worst cases. Illnesses that are low in probability usually incur high medical costs – compare kidney failure to flu. The problem with insurance products is that there is no one policy that can cover all your protection needs. Hence, there are “holes” in every policy that you need to augment with other policies. The disadvantages of a whole/term life policy in relations to critical illness and total permanent disability:
- critical illness cover is pretty useless if you do not opt for early payout. This is because critical illness payout is paid in the final stages of your illnesses such that your probability of recovery or even survival is low. This means that from the first detection of the illness, the insurance does not pay you, but only pays when you are about to die. And in fact, your dependents can receive death payments after you die. So having a critical illness coverage only helps in receiving the payout a little earlier before your death.
The solution is to get the best shield plan available. The shield plan will be able to cover a substantial amount of hospital treatment and warding when you are contracted with the illness. With the shield plan, you will not be financially strained with prolong treatment. If you can only afford to get one policy, then it should be the shield plan.
- total permanent disability (TPD) only pays when you lose a pair of limbs and is irrecoverable. What you can do is to buy an accident plan, where it has different payout percentage of the sum assured for disability of different parts of your body. In this case, you can claim if you lose a leg or an eye and need not be a pair. However, an accident plan is only claimable if your injury or disability is sustained during an accident. Alternatively, you can buy a partial disability income policy, such that in the event you cannot work, be it due to accident or illness, you can be compensated monthly. Even if you are wheelchaired but can recover, you can still claim.
Scenario 2 – Likewise, a whole/term life policy would cover for my worst case scenario 2. The money is to help the dependents after a stream of income is lost in the family. You do not need this if you have no dependents.
Scenario 3 - Shield plan becomes very important to my parents to cover hospital bills. In addition, eldershield can be bought in case they lost their ability to carry out daily functions and require private nurse to look after them.
As you can see, the approach is to insure yourself against worst case scenarios that will have the biggest impact on your life. There is no point in looking at the gains when buying an insurance policy. For example, if you are looking at something that is high probability in nature, like falling sick with common flu, sore throat, fever, etc, that can be cured by a general practitioner, and you are insured for this rather than getting an accident plan. You may claim 100 times for years to come, but one day, you get into a car accident and lost your leg and you do not get a single cent. Visitng the general practitioner is a high probability event, but you can afford the costs. Getting hit by car is low probability event, but the costs of treatment may be costly. I understand the example is a little far fetch but I just want to bring across the point clearly. You should insured against the worst and not buy insurance based on returns or rewards.
Click here if you would like to see other posts on insurance.
You may also like:
- Do not buy Critical Illness Insurance
- What are you really covered under insurance?
- Insure yourself against Partial Disability
- Influenced by Advice on Life Insurance
- Whole life insurance or term insurance? Advice from consultant
- The "Real" Role of Insurance
- It is profitable to be an insurance agent
- Do not buy Whole Life Insurance
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