Buying Insurance

This is a post by d.o.g. from the ValueBuddies forum.

WARNING: LONG POST

There are a few basic types of insurance available to the consumer:

  • Life Insurance
  • Hospitalization & Surgical (H&S) Insurance
  • Disability Income
  • Critical Illness
  • 1. Life insurance

    This pays upon death or total permanent disability (TPD). It can be for a limited term i.e. 5, 10, 20 years etc, or it can be for the insured’s lifetime (whole life).

    Term insurance is very cheap because it only covers the actual risk of death/TPD. Since it is pure insurance, all the premium paid is an expense and cannot be recovered. It is very useful for paying off liabilities that have a reasonably clear expiry date e.g. children graduate from university (age 25), aged parents pass away (age 100) etc.

    Another reason term insurance is so cheap is because it’s a commodity – you are either dead or not dead (produce death certificate) and you are either TPD or not TPD (produce doctor’s certificate). So the insurers cannot try to mislead you with smoke and mirrors or fancy names. Delaying payout will just hurt their own reputation and future business. So they are forced to compete on price, which is a great benefit to consumers.

    Term policies are usually structured so that the payments are level during the life of the policy. However, since the age of the insured will affect the odds of death/TPD, the premiums will be calculated based on the aging of the insured during the policy. A term policy of any given duration will be more expensive for an older person than a younger one.

    Whole life insurance essentially splits the premium paid into 2 portions: a small part actually pays for term life insurance (and is not recovered), while the bulk of the money is invested on your behalf by the insurer. Over time, the invested money grows, while the actual insurance coverage declines. The sum of the invested money and the remaining insurance coverage forms the “sum assured”. This is not seen by the consumer – the internal offset is calculated by the insurer and only the sum assured is shown to the consumer. By the time the consumer is old e.g. age 65 there is actually little or no insurance coverage left, only the investment sum.

    Endowment plans are dressed-up whole life plans where even less of the money pays for insurance. They are basically an investment product masquerading as insurance. Education plans are just endowment plans with a nice name.

    Insurance-linked products (ILPs) are even more blatant investment products where as little as 1% of the money is actually used to buy insurance initially so the insurance cover is laughable, usually only 125% of the invested sum. Since your investment sum is already 100% of this amount you are only buying an additional 25% of insurance cover. More insidiously, as you get older the sum deducted for life insurance (mortality charges) goes up, so less and less of your money is invested. When you are very old the mortality charges increase exponentially and exceed your investment returns, so the total value of your investment will decline rapidly.

    I have discussed term, whole life, endowment and ILP policies together because they offer varying combinations of insurance and investment. Unless you are totally incompetent at investing AND cannot find the discipline to invest in a low-cost index fund, the most sensible ratio is 100% insurance and zero investment i.e. completely separate insurance and investment.

    2. Hospitalization & Surgical (H&S) Insurance

    This pays hospital bills. Qualifying expenses are paid up to the limit specified in the policy. There is usually both an annual limit and a lifetime limit. Beyond these the consumer must pay, first out of Medisave and then out of pocket.

    There are Shield-type plans offered by the local insurers that serve this function. The premiums can be paid out of Medisave. The limitations are that they all set a minimum bill size (excess) before the policy kicks in, and the qualifying amount is only partially reimbursed, usually 85%. So for small bills the consumer pays everything out of Medisave and his/her own pocket. Some insurers offer a rider, payable only by cash, that can pay the 15% co-payment, or cover the excess. Talk to an insurance broker if you are not clear.

    There are also other non-Shield plans that do not require an excess and can pay 100% of the bill, but the premiums must be paid by cash.

    H&S premiums go up as you get older to reflect the increased likelihood of hospitalization as well as the increased bill size. The Shield-type plans have lifetime coverage versions available. IMHO everyone should buy the most coverage they can afford, because (a) it’s paid from Medisave which cannot otherwise be used, and (b) coverage can be reduced in future if premiums go up, but is almost impossible to increase if illnesses strike.

    3. Disability Income

    This pays when you are unable to work for any reason, or when you are disabled and can only earn a fraction of your former wages. The policy kicks in after a set period, usually 60 days, and pays a percentage, often 75%, of the difference between your new wage and your old one. It will pay until you are 65. So if you earn $3,000 at age 30 and are suddenly struck down and become a quadriplegic, after 60 days the policy will kick in and pay $2,250 per month until you are 65.

    This type of policy is very useful because few people finish their working life without any type of extended absence from work. So if you get into a car accident and are out of work for 6 months, you only lose 2 months of income instead of 6. In the worst case when you become a vegetable, your policy will cover your long-term care until you are 65. It is also of the greatest value at the point when you need it most – at the start of your career when your only asset is your ability to work.

    Policies differ by waiting period, percentage of reimbursement and last payment. Obviously the cheapest policies will have longer waiting periods e.g. 90 days, lower reimbursement e.g. 2/3 and earlier last payments e.g. age 50.

    However, it is not easy to find a good disability income policy. Some of the insurers have revised their policies for the worse. So read the fine print carefully.

    Some insurers offer a “hospital income” policy which pays you a set sum for each day you are in hospital. This is basically an inferior version of disability income, since it only pays when you are in hospital and not when you are at home recovering. The sums are typically about $100 per day which will not cover the hospital bill, and there is no payment when you are recovering at home. Use H&S to cover the hospital bill, and use disability income to replace lost income. A hospital income policy is basically a waste of money.

    4. Critical Illness

    This policy pays upon diagnosis of the onset of any one in a set list of 30 “dread diseases”. The local insurers now use a common pool of definitions for the diseases, so it is no longer possible to shop around for the most lenient insurers. However, different insurers have different diseases in their set of 30 e.g. some may have lupus (for women) while others may not. Note that the required diagnosis can be very specific. If it says “2 or more artery blockages” and you get a heart attack involving 1 blocked artery, tough luck, there will be no payment. Once payment is made the policy expires. Some policies allow multiple claims, but this is obviously a marketing trick – you have already paid for the higher coverage in your premiums.

    Since it is rare to get a dread disease without going to hospital, it is debatable whether critical illness coverage is truly useful. It CAN be useful for miscellaneous expenses like a wheelchair or a maid, but these can often be self-insured from savings. It may be OK to not have critical illness coverage. It is not OK to go without H&S coverage.

    Critical illness policies come in both term, rider and whole life versions. The rider is basically an extra premium on top of an existing policy that gives the critical illness coverage. Again, if you decide to buy a critical illness plan, it is probably best to buy term. That way you get the most coverage for your dollar.

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    IMHO the order of priority for insurance expenses should be:

    1. H&S
    2. Disability income
    3. Term life (if there are liabilties that need to be paid)
    4. Critical illness (optional)

    It may sound obvious, but people who do not have dependents should not buy ANY life insurance since nobody will be financially worse off if they die. Likewise there is no point buying life insurance on the life of a child, because the death of a child does not result in economic loss (emotional loss yes, but money can’t make up for that).

    Also, VERY IMPORTANT: make sure that whatever H&S and critical illness policies you buy are GUARANTEED RENEWABLE, not just renewable. The reason is that H&S policies that are merely renewable (not guaranteed) will obviously not be renewed once you make a claim i.e. your coverage is one-use only. The insurer may also decline to renew your critical illness coverage if you fall ill, even if you don’t make a claim. Such “renewable” plans are MUCH cheaper and the agent may try to sell you one on the basis of affordability. DO NOT TAKE IT. Only buy GUARANTEED RENEWABLE plans.

    Finally, remember that by law all regulated financial products in Singapore, including insurance, must come with a 14-day “free look” period during which you can cancel the purchase and get all your money back. No questions asked, 100% refund. So you can change your mind – but do it quick!

    mrEngineer wrote:Lastly, I believe all the agents I have met have wasted my time by trying to sell me life policies. Where should I go to look for term policies? Should I go to the insurance company directly? Any recommedations from forumers?

    I personally use an insurance broker. An insurance broker represents many different insurers so you can pick and choose the policy that best fits your needs. Because some insurers e.g. Great Eastern and AIA only use exclusive (tied) agents, you won’t be able to buy their policies from an insurance broker. So you may need to talk to 3 people (one broker and 2 tied agents) if you want to get a complete overview.

    If you are short of time then at least talk to the insurance broker. At the least, even if you can’t get the best policies, you will avoid the worst policies.