Insurance is something mystical. It is akin to the magic of reviving you when you are down. While it may sound important (and useful), in reality, we are often complacent. Singaporeans are still generally underinsured. In times like this where more diseases (SARS, H1N1) are plaguing the world, we SHOULD start taking initiatives to protect our health and wealth. I remembered a distant relative who lived in a bungalow, drove a continental car and as far as I could tell, he had a happy family. Not until his wife was down with a chronic disease few years ago and recently when I learned that he is now living in 4-room flat. And yes, this chronic disease rids his wife of health, and also the wealth of her family. We cannot possibly protect ourselves from all sorts of diseases although we can mitigate some. However when it comes to wealth, surely there is something we can do about it, can’t we?
“It is ok to live in Singapore, as long as you don’t fall sick.” How true with the rising medical and living cost in Singapore. You know, we all have our own insurance. The difference is who suffers the financial loss for it. You are either your own insurer or you can transfer your risk by buying insurance. Don’t risk it, my dear readers. Hence, I will shed some light on the common types of insurance available namely term, life, endowment and health insurance.
Whole Life Insurance
Pay a lump sum of money when one dies. Some policies also pay the lump sum for total and permanent disability – meaning that one has to be disabled completely and not able to work in any job. Life insurance covers till age 100. Life insurance policies have cash value. After a certain number of years, the cash value for most life policies will be higher than the total amount of premiums paid. At the same time, the coverage also increases based on the returns of the life insurance. Some also buy life insurance as a form of investment. The returns are 3-5% which is considered low compared to other investment instruments out there. However, some portions of the returns are guaranteed. The premiums are paid throughout your life until you die.
There is also the limited premium payment life insurance whereby one only has to pay up to certain number of years but yet having coverage for lifetime. The premiums for such policies are usually more expensive but however over the long run, it is much cheaper than a normal life insurance policy.
This is the same as life insurance, except that there is no cash value. This has the same analogy as a lottery plan, either you “win” or you get back nothing (with the premiums you paid considered lost). Coverage is usually only a limited period of time. Unlike life insurance where premium stays the same no matter what happens, premiums of term insurance can go higher as one age. Term insurance may come with two additional clauses namely: convertible where one can convert it into life insurance without medical underwriting and renewable where one can renew his term insurance regardless of medical condition. There are few kinds of term insurance:
Increasing term insurance: Coverage increases as one age.
Decreasing term insurance: Coverage decreases as one age. (Like a housing loan insurance)
Level term insurance: Premium and coverage stays the same throughout the term of the insurance.
Although term insurance is cheap, do note that the prices of term insurance do vary a lot at different ages relative to different companies. This means that company Y may offer the cheapest term insurance at the age 30 does not mean it will offer the cheapest term insurance at age 60.
Life insurance or buy term, invest the rest?
This has always been a highly debatable topic amongst the financial blogosphere. To really answer this question, is tantamount to comparing this scenario: To choose to dine at a seafood restaurant near your place for more expensive and less appetising dishes or to drive all the way to JB to eat at a seafood restaurant for much cheaper and better food. Yup, you get me; it is a matter of preference. Each has its own merits and flaws. Some might say even after adding the cost of fuel, it is still worth to dine in JB. Others might say that dining at JB put you in a predicament of additional risk such as traffic jam and safety issues.
So really, don’t just listen to all the hearsays and the so-called “experts”, ask yourself what are your preferences such as time horizon, risk appetite, budget and insurance to protect which aspect of your wealth. A financial planner can help you in this.
Endowment insurance is a savings plan where one can plan ahead to fund certain needs once the policy matures. This is what I call the “discipline” savings plan where one is forced to save aside certain of money every year to reach his financial goal.
Endowment insurance offers a guaranteed sum assured which one can easily plan ahead. However, endowment insurance is illiquid which means that surrendering the policy early will be subjected to heavy penalty. Moreover, the returns for endowment insurance are somewhat low around 3-5%.
Endowment insurance is highly popular for higher education funding. This is because of the guaranteed portion which almost no investment schemes can offer.
This is insurance for hospital expenses aka medishield plan. This plan covers only hospitalisation related expenses and premiums are paid usually by medisave. There are plans that are paid using cash as well. Some of you may not be aware as all of us are covered with at least the Basic plan by CPF (unless you withdrew it). There are better plans offer by CPF such as Plan A and B. However such plans are only good for staying in ward B2 and below. Even then, the benefits are minimal and insufficient if one were to get hit by a catastrophic illness such as cancer.
There are private medishield plans offer by insurers that covers class A wards and even private hospitalisation expenses. Private Medishield plans usually offer “As charged” benefits meaning that one can claim a no limit amount for that benefit. However, all medishield plans paid by medisave come with a deductible and co-insurance which one has to bear 10% + ($1500 - $3000 depending on the ward you stay) of the hospital cost. Some insurers offer riders to the medishield to cover the deductible, co-insurance and even daily cash during your hospitalisation stay. However, these riders are only payable by cash.
Well do note that staying in a private hospital is definitely much more expensive. The 10% you have to bear for staying in one may at least be few times more than staying in a Government hospital. For example, one who stayed in a private hospital for a few months with a total bill of $230,000 will have to top up $22,700 (10% + $3000 deductible) in cash. Should he have chosen to stay in a Government hospital; he might end up paying only less than $10,000.
Another point to take note that staying in class A ward is subjected to no subsidies. This means you will be treated as a “class A” citizen where you have to bear higher medical cost the next time you visit a poly clinic (by which you cannot claim from Medishield) For example, you may have to pay $50 for a doctor consultation instead of $10.
Having said that...
I would think that private hospital is the best (based on many opinions) if you want the best medical care. After all, it is your health we are talking about. Note that I’m not trying to cast any personal opinion as this is just something for you to consider.
Well, there are other forms of insurance available but I will not dwell into details, namely:
Critical illness insurance: A lump sum payout to the insured that is once, stricken with any of the 30 (mostly for all insurers) diseases.
Income disability insurance: Protect against the loss of income for the period that the insured cannot work by giving a monthly income.
Personal accident insurance: Protect against accidents only. This means - an unexpected event that involves injury or death only by external, violent and visible means.
Well this is it on insurance planning. Next article I have is on basic investment concepts.
Category: Insurance | 2 Comments