Savings, System and Security (Part 3)

Part 3 of the 3-S is Security, or your safety net in times of misfortunes.

Most people insure their homes, cars, businesses and other assets, but fail to realise the importance of insuring the greatest asset of all - themselves.

Insurance is a vital component of wealth building. Without adequate insurance, our hard-earned savings or assets will go down the drain should we be struck with a life threatening illness, permanent disability or premature death.

When we start work, we have a potential to earn a large sum of money. For most, it will be more than a million dollars (SGD). However, all these are just 'potential' earnings and have not materialized yet. An illness or disability could easily wipe out these potential earnings as our capacity to work will be affected.

It is important to seek a qualified insurance consultant to work out what is the adequate level of insurance cover you need. Your consultant should be able to project your family's expenses throughout the years to ensure that they can continue living at the current standard of living in the event of your demise.

For illnesses, it pays to be aware of what are the potential costs of treatment for the common diseases such as cancer and heart disease. As the saying goes, one can afford dying, but can't afford getting sick. Therefore I'll usually emphasize to my clients on the importance of critical illness insurance. It is also important to be covered under a comprehensive hospital and surgical insurance plan to help pay for your medical bills.

I often say: "Many people have insurance plans, but few have insurance planning". This means that people usually purchase insurance policies on an ad-hoc basis, without actually considering how this new purchase will contribute positively to his/her insurance portfolio. Insurance planning is an art, and the difficult part of it is balancing the various aspect of coverage, using a limited budget.

Having found out your optimal amount of insurance coverage from your life insurance adviser, you can choose to do 3 things. One, to do all you can to FULLY cover the shortfall. Two, to use a comfortable budget to cover PART of your shortfall, without compromising your existing lifestyle and expenses. Third, to do NOTHING and leave things as it is. I'm sure many of us would have chosen choice 2 during our previous purchases of insurance policies. However, do ensure that in future as your salary increase, top-up your insurance coverage so that it is in line with your lifestyle needs, and seek to cover more and more of your shortfall gradually. A good insurance advisor should be one who can provide honest and justified recommendations to help you cover as much of your shortfall as possible, at a reasonable price.

That's all for the final part of the 3-S system of wealth management. I'll be touching on more details in future posts.