Insurance Policies you should buy
Insurance Policies You Should Buy
There is a wide variety of insurance products in the market, each meeting the different needs of consumers who require some form of protection, be it protection of savings, future income or against the financial loss that comes with travel incidents. What are the types of insurance plans available and how do they serve your needs? There are three broad categories of insurance products which you could consider buying at different stages of your life or for specific circumstances:
- Life Insurance
- Health Insurance
- General Insurance
Within these categories, the number of products that are offered is jaw-dropping. What are they and what should you look out for when deciding which to buy? Let’s take a closer look at each category.
Life Insurance
Do you remember the occasions when you were approached by financial advisers asking if you have some form of financial planning and if you would like higher returns from your investments? I do, plenty of times. The conversations would usually lead to the various types of insurance products available from the advisers, and life insurance, most often than not, would make an “appearance”. Issues such as death and disability would most probably be broached since life insurance is about protection against financial loss that would result from premature death of the insured. Some of us who are sceptical might stop the conversation because these issues could be too sensitive or simply, the concept of life insurance is too complex to understand.
What is life insurance?
A life insurance policy pays out an agreed amount known as the sum assured under certain circumstances e.g. when the insured pass on. This money is intended to help the insured meet his/her financial needs and/or those of the dependants. Depending on the terms of the policy, the sum assured is also paid to the insured should he or she becomes totally or permanently disabled.
Types of Life insurance
There are four basic types of life insurance products:
- Term Insurance
- Whole Life Insurance/Permanent Life Insurance
- Universal Life Insurance
- Variable Life Insurance
Term insurance
Term insurance provides coverage for a certain period of time. It is specifically designed to secure your family needs in case of death or uncertainty and provides specific amount of coverage for specific period of time. It provides protection against death, terminal illness and permanent disability. As the protection provided by term insurance is only for a fixed period, term plans can be used to plan the amount of coverage over different life stages since priorities do change as one grows older. Flat premiums are paid for 5 to 40 years depending on your needs. Read more… [Suggestion to Clement: to hyperlink to para 1 below]
Whole life insurance/Permanent life insurance
Whole life insurance is a type of permanent life insurance designed to provide lifetime coverage. It has a cash value that functions as a savings component. Because of this, it usually has higher premiums than term life insurance. The amount of premium paid throughout the policy may be constant or subject to change depending on the terms. Whole life insurance pays out the death benefit upon the demise of the insured. It provides policyholders with the ability to accumulate wealth as regular premium payments cover insurance costs. Read more… [Suggestion to Clement: to hyperlink to para 2 below]
Universal life insurance
Universal life insurance is a type of permanent life insurance that provides more flexibility than whole life insurance. It offers the low-cost protection of term life insurance as well as a savings element which is invested to provide a cash value build-up. The death benefit, savings component and premiums can be reviewed and altered as a policyholder’s circumstances change. Universal life insurance also allows the policyholder to use the interest from the accumulated savings to help pay premiums over time.
Variable life insurance
Variable life insurance is a permanent life insurance policy with an investment component and provides permanent protection to the beneficiary upon the demise of the policyholder. It is generally more expensive than term insurance because it allows the insured to allocate a portion of the premium to a separate account or cash value account that consists of various financial instruments and investment funds within the insurance company’s portfolio such as stocks, bonds, equity funds, money market funds and bond funds.
Term insurance provides a potential death benefit for a fixed period or “term”. As such, the sum assured will only be paid upon the death of the insured or if the insured becomes totally and permanently disabled during this period. As there are no savings or investment features in term insurance, once the policy expired, the premiums spent are gone and no portion of the premiums will be returned to the insured, that is, there is no cash value if the policy ends or is terminated prematurely. There are different forms of whole life insurance policies:
participating (par),
non-participating (non-par), and
investment-linked policies (ILPs).
Par policies pay bonuses and build up cash values. Upon the demise of the insured, par policies usually pay the basic sum assured plus any bonuses accumulated to date as the death benefit.
Non-par policies do not pay bonuses but build up some cash value over time. These cash values are
guaranteed and are paid out if the policy is surrendered early. The death benefit comprises the sum assured only.
Investment-linked policies (ILPs) have both life insurance and investment components. Premiums are used to pay for units in investment-linked sub-fund(s) of a policyholder’s choice.
Whole life insurance policies which are ILPs or participating policies cost more because in addition to paying for insurance coverage, some of the premiums are invested to build up cash value. ILPs provide insurance protection in the event of death or total and permanent disability if these are included in the terms. Some consumers prefer ILPs because it offers more exposure to investments than what other life insurance products may provide.
The appeal to variable life insurance lies in the investment element of the policy. The cash value account has the potential to grow as the underlying investments in the policy’s sub-accounts grow.
Another aspect of variable life insurance that makes it stand out is the flexibility it provides policyholders in terms of premiums paid and cash value accumulation. Premiums paid to a variable life insurance policy are not fixed. They can be shifted up or down over time within certain limits based on the needs of the insured. For example, an insured with a variable life insurance policy may decide to reduce monthly premium payments from $200 to $100 because a major expense may have slowed down cash flow for a period of time. The cash value within the policy can be used to make up the shortage in premium payments during the time lower premium payments are made. When cash flow returns to a comfortable level, the insured has the option to increase premiums back to the initial $200 per month.
Health Insurance
Health insurance is a type of insurance coverage that covers the cost of an insured individual’s medical and surgical expenses. Depending on the type of health insurance coverage, either the insured pays costs out-of-pocket and is then reimbursed, or the insurer makes payments directly to the healthcare provider such as hospitals and clinics.
What is health insurance?
There might be situations in life where an accident, illness or disability leave you with some financial losses. Besides incurring medical and/or hospitalisation costs, the situation may result in the inability to work, whether partially or fully, during your recovery. A health insurance would help you and your family cope with expenses at these times. There are different health insurance policies, some provide cash to help make up for income loss while you are disabled or hospitalized; some help cover the cost of medical treatment or nursing care.
Health insurance should be bought while you are still young and healthy. If you apply for insurance after you have developed some health conditions, the insurer may exclude these conditions from coverage. Most policies also have a last entry age after which you will not be able to apply for coverage. Check also if the healthcare coverage provided by your employer is enough and whether your employment benefits include group health insurance coverage. Do note that group insurance policies may not cover you when you change employer or retire so you should consider having a personal policy as well. Do not wait until you are no longer working to buy a health insurance policy as you may no longer be insurable due to age or poor health.
Here are some common health insurance policies to consider:
- Medical Expense Insurance
- Critical Illness Insurance
- Disability Income Insurance
- Hospital Cash Insurance
- Long Term Care Insurance
Medical Expense Insurance
Medical expense insurance pays for certain medical expenses incurred because of an accident or illness. Medical expenses can arise from any of the following medical treatments or procedures:
in-patient medical treatment or surgery,
day surgery,
consultations with specialists before, during and after the hospital stay,
X-rays and laboratory tests.
‘Major’ medical expense insurance will pay expenses for longer hospital stays due to a major illness like cancer or for major surgery such as heart bypass surgery or organ transplant. An example of medical expense insurance is the MediShield Life scheme which is a basic health insurance plan, administered by the Central Provident Fund (CPF) Board, which helps to pay for large hospital bills and selected costly outpatient treatments, such as dialysis and chemotherapy for cancer. However, MediShield Life payouts are pegged at Class B2/C wards. If you plan to use Class A/B1 wards in the public hospital or go to a private hospital, you may wish to consider purchasing Medisave-approved private Integrated Shield Plans (IPs).
Critical Illness Insurance
Critical illness insurance pays a lump sum either when you are first diagnosed with a critical illness covered by the policy, or after having a type of surgery covered by the policy. The lump sum does not depend on your admission into hospital or on your actual medical expenses. A critical illness benefit can be sold as a stand-alone plan or policy or be packaged into a life policy or as an optional rider to a life policy. The types of critical illnesses covered may vary from one insurer to another. But most major illnesses and types of surgery are covered by almost all policies. These include:
major cancers,
heart attack,
coronary artery bypass surgery,
stroke and
kidney failure.
Disability Income Insurance
Disability income insurance pays a fixed amount each month to replace the income you would lose if you are unable to work as a result of an accident or illness. These policies may pay up to 80% of your average monthly salary. The policy aims to ease your financial loss, but will not completely replace the income you earned before the accident or illness.
Hospital Cash Insurance
Hospital cash insurance pays a fixed amount of money for each day you are hospitalised for medical treatment or surgery. The total amount paid under this policy may be more or less than your actual medical expenses.
Long Term Care Insurance
Long-term care insurance pays a fixed amount of benefit each month towards expenses for long-term nursing treatment. There is usually a minimum entry age imposed and the maximum entry age is usually in the range of 70-75 years. Benefits are paid when you cannot perform certain ‘activities of daily living’ (ADL) on your own. These include, but are not limited to,
bathing,
dressing,
feeding,
going to the toilet
moving around, and
transferring
The definition of ‘activities of daily living’ and the minimum number of activities that you are unable to perform to qualify for the benefits may vary from one policy to another.
An example of Long Term Care Insurance is the ElderShield scheme (suggestion to Clement: perhaps to hyperlink to the previous article on ElderShield scheme) which is a severe disability insurance scheme launched in 2002 by the Ministry of Health to provide basic financial protection to Singaporeans who need long-term care, especially in their old age. It is designed to help supplement savings in the event of severe disability. Policyholders will receive a monthly cash payout for a period of time to help pay for out-of-pocket expenses depending on the plan that policyholders are on. Singaporeans and Permanent Residents are automatically enrolled in ElderShield at the age of 40, unless they opt out of the scheme.
The above are general information on the various life and health insurance policies. The details are within each policy documents which may have terms and conditions that define what condition is covered and what is not. It is advisable to find out more from your financial adviser the terms that are attached to the policies. For instance, some critical illness policies pay a smaller amount for earlier stages of cancer, or make several payments upon diagnosis of some types of critical illnesses, subject to the sum insured or policy limits.
General Insurance
General insurance typically covers motor, property and travel insurance, amongst many others. General insurance gives you some financial coverage against a range of events or losses that could be suffered, for example:
Loss of your belongings while travelling overseas,
Damage to your car due to an accident or
Damage to your house due to say, fire.
If the event happens, your insurance company will pay you an agreed amount, or an amount to cover some or all of the loss.
What type of insurance products should you buy for a start?
With so many products that are available, you might be at a loss of what policies to buy. For a start, you might want to consider getting the following policies based on the three broad categories of insurance products:
Whatever your decision is, remember to first take note of your needs and then approach a financial adviser for more information in order to aid you in your decision-making process. You should also be aware that most policies come with attached terms and conditions that define what circumstances are covered and what are not. Therefore, it is important to go through these terms or get your financial adviser or the insurance company to explain the details before you commit to any policies.
Sources:
Moneysense.gov.sg
Central Provident Fund Board
Dollarandsense.sg
Ministry of Health
General Insurance Association of Singapore
Life Insurance Association of Singapore
Medical News Today
DIYInsurance