Insuring yourself before the rain comes

WHEN the 2008 global financial crisis hit, the biggest challenge in my life then was the Primary School Leaving Examination. I remember rushing to do mock math papers in a bid to master every “tricky question” examiners could throw at us.

Many of us Gen Zs and younger millennials may have been oblivious to how our parents tightened their belts when inflation rates ranged between 5 and 8 per cent year-on-year in 2008.

Yet we face similar challenges today, with headline inflation hitting 5.6 per cent in May this year.

As prices rise, our spending power falls. Even if wages have risen over the years, they are unlikely to keep pace with today’s inflation rates.

Even as more retail investors participated in stock markets during the pandemic, those who began investing in the last year may not have done much better either. Both the MSCI ACWI index and the S&P 500 turned bearish in June, falling by 20 per cent from their recent highs.

And it feels like we may only be feeling the first drops of rain as we sail into a storm.

To fight near 40-year-high inflation rates in the United States, the Federal Reserve has hiked the federal funds rate to between 1.5 and 1.75 per cent. Economists in a Jun 22 Reuters poll expect it to rise further to between 3.25 and 3.5 per cent by year-end.

As Singapore is a small and open economy, local interest rates will rise in tandem with global ones, making loans for homes and cars more expensive.

Already, fixed-rate mortgages are rising towards 3 per cent at the 3 local banks. For those who have bought into the heated HDB resale market in recent years, that is likely to mean further pain.

As consumers begin tightening their belts, companies with weaker balance sheets may start cutting jobs too, even as the broader labour market remains robust.

In June, Singapore-headquartered digital currency exchange Crypto.com made a 5 per cent cut to its headcount. Shopee, the e-commerce arm of Sea, has also also laid off some staff from teams in South-east Asia.

Ultimately, higher interest rates will crimp consumer demand and potentially tip us into a recession. Already, Fed Chair Jerome Powell has said that achieving a “soft landing”, where inflation is controlled without a recession, would be “very challenging”.

Faced with multiple headwinds, it would not be straightforward to “make bank” today.

Instead of trying to buy the dip in stocks (or apply for Build-To-Order flats as my colleagues love to suggest), I decided to re-examine my insurance policies.

Apart from the health insurance that my parents took out for me, I found that I was under-insured for whole life, critical illness, disability and personal insurance.

If you too would like to re-examine your insurance coverage, here are some tips that I learnt along my own insurance journey.

Firstly, you should look to cover yourself in the order above, and be prepared to spend about 3 to 10 per cent of your take-home income or more, if you wish to take up an investment-linked policy (ILP). 

With life insurance, you should look to cover about 5 to 7 times your yearly income or your existing liabilities. 

If you are younger, it is actually cheaper to buy a policy with a higher sum assured than if you wait till you are older. Therefore, you may want to make some educated guesses on your future liabilities or income and pay a bit more to increase this coverage. 

Secondly, critical illness coverage can be added to life insurance policies as riders, so you should plan for them together. 

While there are many critical illness policies out there, I found that policies that allow for multiple claims for different critical illnesses will cost more than those that do not allow this but provide a higher payout.

Personally, I opted for one that would provide a single payout with a higher sum assured, to offer myself some basic protection for now. Also, I wonder how sickly I would have to be, to be stricken with 5 critical illnesses in my lifetime.

Thirdly, I would recommend asking around and talking to friends of the same age group who have bought plans from different insurance providers and agents. 

Take a look at the sum assured and other features of your policies so that you have a better understanding of whether any additional features are worth the premium. 

Lastly, if you have come this far in the article, I would suggest that you skip ILPs in favour of term policies – which are generally cheaper – and make your own separate investments.

Usually, ILPs involve some form of investment component on top of the protection that you receive from your insurance policy.

Although these policies will let you choose between some sub-funds based on your risk appetite, these limited options could incur higher annual management fees and policy fees than you would like.

When investment opportunities are slim, we could gain from providing ourselves with some “downside” protection by looking at our insurance policies. Rainier days are still ahead of us, and life may still throw many tricky questions our way.