Why Do I Need Insurance?

One of the most common questions advisers can ask is "Why Do I Need Insurance?"

Textbook answers aside, let's all face it. There are uncertainties in life.

We would all love to be able to own our dream home, dream car, go for as many holidays as we like and do all the things we would like to do. However, this often rests on the some critical assumptions:

1) You have a lot of spare cash or

2) You are able and working to provide for your family and yourself.

For most people, option 1 comes about from investment gains and savings which will still bring one back to option 2. Lottery gains aside, many of the things we want need money which is often obtained by working for it. Thus, many things are possible when you are able.

Let's make some changes to that assumption.

Let's just say one day on dream holiday trip, you, a successful sales executive, meet with a major accident that renders you unable to move around freely to continue with the career that you have spent huge amount of time and money investing into to build up. The following questions will likely occur:

Am I able to pay for the hospital bills that have resulted from the surgeries and hospital stays?

With my loss of freedom of movement, will I be able to work to ensure I still have income?

If I can't continue in the same job, will I be able to find employment that ensures the same amount of income that I currently enjoy?

Do I or my family have enough money to pay for our daily needs and children's education fees from now on?

Will I be requiring professional medical care as well as long term nursing assistance which will translate into long term medical bills?

In the event an unforseen illness or accident should occur, it is often not just the immediate cash needs one need to worry about. It is often the long term financial requirements, impact and loss of income that one needs to consider about as well.

Unlikely? Think again.

A recent case I heard of was a successful self employed designer who suffered a stroke attack in his early 30s. This rendered him unable to continue with his business. Early thyroid problems had prevented him from being insured. This meant the savings he had from his business which is now defunct were all wiped out due to treatment requirements. He is currently looking for secondary employment which would likely not be able to pay him his previous salary and his future income would look very uncertain as well.

It would be advisable for one to speak with a qualified adviser who would be able to advise on how one can best provide for life's uncertainties and how the wide universe of insurance products can be best used for one's benefit.

Health Insurance = Life Insurance ?

In my course of work, I have often come across clients who claim they have insurance. It is the first intuitive response of most people to say this when they meet an adviser. When probed more closely, it is often not surprising to find that most do not have an idea of what they are covered for.

One of the most common misconceptions people have is to think that life insurance will cover hospital bills. Yes it is possible to use some of the money one receives from a life insurance claim to pay for your hospital bills but what happens if one should admit into the hospital and does not qualify for a life insurance claim?

This is a recent case I dealt with. Mr Q had always thought he had himself covered for hospital bills as he had clearly instructed his agent to prepare a policy to cover this aspect besides his normal life insurance. Mr Q deserves praise for taking active steps to ensure he is protected against hospitalisation risk.

However, it turns out Mr Q only had two life insurance policies in the end. One of the policies had a small sum of medical reimbursement of $5,000. In today's day and age, $5,000 can hardly be considered sufficient for a surgery.

This meant that unless Mr Q should pass on or be struck with total and permanent disability or one of the 30 critical illnesses, Mr Q would NOT be able to claim hospital expenses. The only exception was if he met with an accident which would pay $5,000 from the medical reimbursement aspect.

There are many types of insurance meant for different purposes. Health insurance is meant specifically to provide for medical bills while life insurance is meant to provide for sudden loss of income, legacy and other monetary requirements in event of unfortunate circumstances.

It is greatly advisable for one to ensure that one has not only sufficient, but also the RIGHT insurance to avoid any rude shocks when one should need protection the most.

What are Riders?

Riders, also known as supplementary benefits, are special policy provisions that provide benefits not found in the main policy provision or make adjustments to it. These provisions are then attached to or "ride" a basic policy, thus giving its name.

Most riders have to be specifically requested to be included subject to the insurer's approval and cannot exist without a base policy. This means one cannot by riders without a main policy first. When a rider is added into the policy automatically or by request, it will be reflected into the policy schedule with an endorsement that outlines the details of the rider. The tenure of a rider cannot exceed that of the main policy as well.

Common riders one would find include:

• Waiver of Premium Rider
• Total and Permanent Disability Rider
• Criticall Illness Rider
• Accidental Death Rider
• Payor Benefit Rider
  

...and many more. It would be advisable to discuss which riders are suitable with your personal advisor.

For example, Mr X purchases a Whole Life policy which covers against Death and Total Permanent Disability. He requests to add on a Critical Illness Rider which allows him to claim in the event of a critical illness. Without the rider, he would not be able to exercise the claim. He would pay the premium for the main policy + the premium for the rider for this entire policy.

What is Endowment Insurance?

Endowment insurance is a form of insurance that combines insurance protection with a savings plan for the owner. It is designed to pay out the death benefit when the insured dies during the term of the policy or survives at the end of the term.

Unlike a Whole Life policy, an endowment policy has a fixed maturity date where the policy will end. Endowment policies typically run for 10, 15, 20, 25 years or up to a certain age limit.

As it is a form of participating insurance, the policy does accumulate value. Thus, if no claim is exercised during the term of the policy, a lump sum known as the maturity value which includes the sum assured and bonuses will be paid out at the maturity date.

Features of Endowment Insurance:

• Specified duration of cover at the beginning/inception of the policy. The policy is said to mature at the end of the term.


• Cover would cease at the end of the term. If no claim is exercised during the duration of the policy, maturity value will be paid out.


• Typically acuumulates value at a faster rate or greater amount than other policies.


• Premiums are typically higher than Whole Life or Term policies.


• Policy may lapse if premiums are not paid in time and the policy has yet to accumulate bonus values, particularly in the first few years of the policy.


• Policy may have policy loan and non-forfeiture options.

Terminology - Non-Forfeiture Options

Non-Forfeiture Options

These options are only granted with policies that accumulate cash value such as Whole Life Insurance and Endowment Insurance.

These are options which exist to prevent the lapsing or forfeiture of policies due to non-payment of premiums. Common non-forfeiture options include:

• Cash Value Option - Policy owner can receive the cash value accumulated under his/her policy if he/she chooses to surrender the policy (often subjected to a certain waiting period.)
• Reduced Paid Up Insurance - Policy owner can use cash values accumulated to purchase a single premium paid-up policy with a reduced sum assured at the rate attached to the age when this option is exercised. The paid up policy will also usually be non-participating in nature.
• Extended Term Insurance - Policy owner can use the cash value accumulated to purchase an extended term policy for a sum assured equal to that of the original policy. The length of the term is however, dependent on the cash value available as well as the owner's age as it will be based on the owner's current age. Thus, a policy with high cash value may end up with an extended coverage that would be in force for a longer period of time. This is useful for people who may be experiencing financial difficulties and have problems paying the premiums. Note that this option may not always be available to all policies.

Terminology - Policy Loan

Policy Loan

This option may be available on policies that acquire cash value. This allows owners to use the policy as a collateral for a policy loan.

It is actually an advancement of the cash value under the policy owner's policy. Thus, it will reduce the amount payable in event of a claim or if the policy owner chooses to surrender the policy. As interest is payable on the loan, the amount payable will be reduced by the amount of the policy loan plus accrued interest.

An important note about policy loans is that if the policy owner fails to pay the interest due on policy anniversary, the outstanding interest will be added to the principal and later charged at the same rate as that of the principal. If this outstanding amount exceeds the cash value of the policy, the policy will be terminated and all premiums paid will not be refunded.

It is advisable to check for exact terms and conditions with your insurer before embarking on a policy loan.

What is Term Insurance?

Term insurance is a form of insurance which provides coverage for only a specified period of time. This period of time is known as the policy term. While most policy terms can range from 5-30 years, there are policies which cover up to age 99 as well.

If the insured passes away or triggers a claim during the policy term, the sum assured will be paid. If no claim is made within the policy term, the policy will cease once the term ends and nothing will be payable to the insured upon the end of the term.

Most term insurance policies are very affordable as they serve to provide protection purposes for a specified period of time and have no cash value. Thus, they are non-participating in nature and there are no bonuses accumulated or paid out. This is the reason why people do not get money back should they decide to surrender the policy.

The upside of such a feature and its affordability also means it becomes more flexible for the insured to surrender the policy if needed as there is usually no non-forfeiture option (options to prevent the policy from lapsing such as reduced paid-up).

Term insurance can be used as a form of temporary insurance when one is looking for coverage for a period of time or facing budget issues. It is also used as a part of a form of financial strategy known as "Buy Term, Invest The Rest". This will be discussed on a later date.

Features of Term Insurance:

• Covers life of the insured for a specified period of time.
• May include coverage for total and permanent disability and critical illnesses depending on the policy.
• Non- participating and thus has no cash or surrender value.
• Affordable premium amounts. Lowest premiums compared to other forms of life insurance.
• No non-forfeiture or policy loan options.

Terminology - Participating & Non-Participating Policies

Participating Policies

Also known as With-Profit policies.

Refers to life insurance products that share in the profits or surplus of the insurance fund. Policy owners will receive bonuses from the insurer resulting in a death benefit that is greater than the basic sum assured as well as a cash value to the policy.

Non-Participating Policies

Also known as Without-Profit policies.

Refers to life insurance products that do not share in the profits of the insurer. Policy owners will not be entitled to any bonus payment from the insurer.

Terminology - Death Benefit

Death Benefit

Refers to the amount the insured receives in the event of death. The payment is usually made in one lump sum.

In the event that the policy covers total and permanent disability, the amount under death benefit may be paid to the insured in a series of payments depending on the structure of the policy.

Terminology - Cash Value

Cash Value

Also known as Cash Surrender Value or Reserve.

An estimated value which the insured will receive, before certain adjustments, if he or she chooses to surrender a policy after a period of time. This only applies to participating policies.

For example, Mr A buys a participating whole life policy with a sum assured of $100,000 with an annual premium amount of $1,500. After 10 years, he chooses to surrender the policy. He receives $10,000 in return.

Please note that all these figures are for illustrative purposes only.

What is Whole Life Insurance?

Whole Life Insurance is a form of permanent insurance that covers one for his or her entire life or up to a certain age such as 99 or 100. The expression "Whole Life" may not necessarily refer to the period that payments (known as premiums in insurance terminology) are paid. It refers to the period of which the insured is protected.

A whole life insurance policy will usually cover a person against death. As long as premiums are paid, the death benefit will go to his or her beneficiaries. In the case of a whole life policy which tends to be participating in nature, the policy will tend to accumulate value in the form of bonuses over time. This means one will be able to receive a greater payout than the original sum assured. In the event that a policy covers against total and permanent disability, the sum assured will also be activated should the insured meet with such an occurrence.

Because a whole life policy is usually participating in nature, the policy also tends to have a cash value which gives the owner the choice of taking policy loans, converting the policy to a paid up policy and getting some money back if one chooses to surrender the policy after a period of time. It is generally not recommended to do so as one would lose coverage and may not get back an amount which commensurates to what was paid to the policy.

As the policy is able to grow in value, the premiums will tend to be higher compared to a term policy and may be made in regular payments or in a lump sum (known as single premium insurance).

Common features of Whole Life Insurance:

• Protects against death and/or total permanent disability for life or up to an advanced age.
• Accumulates bonuses which add on to the basic sum assured for greater death benefit (for participating policies)
• Has cash value which is indicative of how much one would get should one decide to surrender the policy (for participating policies)
• Premiums will tend to be higher than that of a normal term policy.
• May have policy loan and non-forfeiture options.

Life Insurance or Life Insurance?

When people talk about life insurance, we are generally referring to the Whole Life policies. Perhaps less known to many is that Life Insurance is actually a category comprising of different type of products namely:

• Whole Life


• Term


• Endowment


• Investment-Linked


• Annuities


• Riders

Thus, the life insurance that most of us talk about is actually only one type of insurance in the much larger life insurance category. It is for this reason that this blog will cover the other types of insurance as well under the bigger umbrella of Life Insurance.

Sounds like greek? Too dry and boring?

My friends, I used to hate insurance. The thought of it brings to mind pesky salesmen.

However, this thought changed when I saw families meet with less-than-fortunate situations and found themselves stuck in sticky financial situations as well as those who were not implicated due to to early good judgement.

When I started working in the personal finance area, I was convinced of why one needed to have sufficient insurance and more importantly, to understand it.

Understanding Insurance?

To write about insurance? It is probably so unexpected that anyone would write about something so dry that it is even a little funny.

In my course of work in personal finance, it has come to my attention that insurance is an area that most people hate to deal with but some will know that it is necessary. It is also common to find people who have multiple policies and yet know nothing or understand a word of the documents.

Studies have shown that many claims never occur in the first place because people or their families are not aware that the policies even exist or are claimable. That would make it a gross waste of money, wouldn't it?

This is a little contribution from me to hopefully shed a little light on the seemingly-jargon-filled world of life insurance and so hopefully that both you and I will learn a little as we go along.