Side Views

Be financially prepared for milestones — Ho Lee Yen

March 24, 2012

MARCH 24 — In his Budget speech this year, Deputy Prime Minister Tharman Shanmugaratnam emphasised that Singaporeans must "retain a deep sense of responsibility for their families and seek every opportunity to improve themselves and do better".

This year is an auspicious year and said to be a good time to plan for life's biggest moments.

Before making that commitment, take a step back and review your current financial health to see if you are in good stead to proceed. Adjust your plans according to your priorities and needs as you journey through the various life stages and seek professional financial advice to review and map out a plan to achieve your financial goals.

I'm starting work!

Sally is 22 years and will be graduating soon. Her parents will stop giving her monthly allowances and will expect her to help pay the household expenses.

While she has some savings, it is not enough to last her for long. She is currently job-hunting so that she can start work immediately upon graduation.

Firstly, Sally should calculate the estimated amount she would need on a monthly basis to ascertain how long her savings can last before she finds a job.

Upon commencing work, she should consider insurance for herself so that she need not rely on her parents for financial assistance should something unexpected happen. It is important that Sally works out an affordable amount for her insurance premium and not over-commit.

To ensure basic coverage, Sally should consider a Medisave-approved Integrated Shield plan and a Term insurance.

She can also add an optional rider to pay for the co-insurance and deductible portions of the medical expenses. This is payable by cash on a yearly basis.

Sally may also consider enhancing her health coverage with a critical illness plan.

This should be bought as early as possible when she is still young and healthy as premiums tend to be cheaper compared to when she is older or is already suffering from an ailment (which may be excluded from the insurance coverage).

I'm considering a career change.

Michael, 32, is single and has been working for five years. He is an only child and both his parents are employed. Michael is considering changing careers to earn more to meet his demand for higher spending power and support his parents when they retire.

Michael should ensure that he has sufficient savings to tide him over the initial period of settling into a new job, including daily expenses, bills and other miscellaneous spending. It is recommended that his savings comfortably last him for at least six months to ensure that in the unexpected event that Michael is not satisfied with his new job and resigns soon after, he will have sufficient funds to tide him over.

With a higher salary, Michael needs to consider: (a) putting aside money for his daily expenses and other needs, (b) planning for his future family, (c) supporting his parents when they retire, and (d) saving for rainy days.

As Michael is the only child, he will be responsible for the care of his parents if they have not adequately prepared for retirement. Michael needs to first ensure that he is adequately protected before he can support his parents and future family.

Health insurance, such as a medical reimbursement and a critical illness plan, are also important for Michael to be financially prepared.

He should have key policies such as income protection plans, whole life plans and/or term insurance plans to ensure that, should the unexpected occur, his families will be able to maintain their current lifestyle without facing financial difficulties.

We're getting married!

Bernard and Linda, both in their early 30s, are planning to get married. They have purchased a five-room flat which will be ready in three years and will stay with their parents in the meantime.

They will consider having children once they've settled into their own home. Meanwhile, they will focus on their careers before the little ones come along.

Bernard and Linda are no longer alone, but have the obligation and responsibility to provide for each other.

They should review their protection needs together by having honest, open conversations about their existing insurance coverage and where there are gaps.

This provides a basis for them to jointly draw up and purchase insurance plans to complement their existing policies and bridge their protection gaps.

The 2011 AIA Singapore Nationwide Protection Survey revealed that although nearly six in 10 Singaporeans professed they have discussed with their spouse the family's living standards should something unexpected happen to them, only 17 per cent believe they are well-prepared and have the necessary financial planning in place to ensure that their dependents will be able to maintain their living standards.

While Bernard and Linda do not have the worry about mortgage and expenses for their children immediately after marriage, it is best to start planning now.

This includes working out the amount required for their new house and setting aside a fund for that. They should also start saving up for their future children.

The key is to start as early as possible so that you have a longer period to accumulate the desired pool of funds and not put unnecessary strain on the finances.

We're having a Dragon baby!

Peter and Sharon are expecting their first born this year! As first-time parents, they are making all the necessary preparations to ensure a smooth pregnancy and delivery. This includes selecting a single-bedded delivery ward at a private hospital and engaging a confinement nanny.

Sharon is also considering stopping work for two years to care for their newborn, resuming work when the child is old enough to be sent to a childcare centre.

Peter or Sharon can use their CPF Medisave to finance the delivery and pre-delivery medical expenses and claim under the Medisave Maternity Package.

They can also claim for expenses incurred during delivery and pre-delivery medical expenses such as consultations, ultrasounds, tests and medications, noting that the withdrawal limit is up to S$4,400 depending on the type of delivery procedure.

As they have opted for a private hospital, charges will be significantly higher and their CPF Medisave accounts may not cover the full charges. They need to be able to pay the balance out-of-pocket expenses.

After the child is born, the parents need to consider many other expenses including the child's education needs. This is financial commitment for about 20 years and requires careful planning.

Ideally, parents should start building the funds even before the child is born.

However, if Peter and Sharon are only starting to plan now, they may consider:

- Endowment plan - a savings plan with protection coverage for a period of time, eg 18-25 years. This will give parents a ready pool of funds by the time the child is ready for tertiary education. Parents can also choose to add on riders that will allow the plan to continue to be in force in the event that they are not able to continue paying the premiums, for example, due to the death of the parent paying for the plan.

- Investment-linked plan (ILP) -provides a combination of investment and protection. The plan invests in ILP sub-funds to earn a potentially higher return depending on factors such as the investment climate. There are ILPs, such as AIA Family First Protect, which allow policyholders to vary the level of protection and investment within the plan, depending on the needs as they progress in life.

They should also consider coverage for their child's health insurance needs, such as protection against common child critical illness, dengue fever and Hand, Foot & Mouth Disease.

As Peter will be the sole breadwinner in the first two years, it is also important that he is adequately insured so that the family's finances will not be affected should anything unexpected happen to him. — Today

* Ho Lee Yen is the chief marketing officer of AIA Singapore.

* This is the personal opinion of the writer or publication. The Malaysian Insider does not endorse the view unless specified.