Wednesday, April 15, 2020

Finance 101: What is an Insurance?

Hi friends, 

 In the 3rd part of my Finance 101 series, I shall be talking about insurance. Oh, I would like to reiterate that I do not receive any commission or money from any financial institutions for my post. I am also not a financial agent or a financial consultant. I do not sell any products/ insurance/ investment plans. Hence, you can expect objective opinions. The finance 101 series is an educational series to spread awareness of the financial instruments available to us.

 By definition 
Protection against loss for which you pay a certain sum periodically in exchange for a guarantee that you'll be compensated under stipulated conditions for any specified loss by fire, accident, death, etc - Entrepreneur.com

 Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients' risks to make payments more affordable for the insured. -
Investopedia

 Term insurance: No cash values insurance
Whole life insurance: Cash value
Participating insurance: Entitled to the profits of the insurance company
Non-participating insurance: Not entitled to the profits of the insurance company 

 The keywords are: 
1. Protection against losses
2. Pay a certain sum periodically

 So insurance works as a form of protection against losses (Death, accidents, critical illnesses, income replacements, hospitalisation, fire, car, etc.) by a periodic (monthly, quarterly, half-yearly, yearly) payment to the insurer. 

 How I think of insurance is like this: 
For different types of fire, we would use different types of fire extinguishers right? Hence, for different types of losses, we would also have different types of insurance. If I feel that I have a higher susceptibility to cancer due to family history, I would purchase critical illness insurance to protect myself. 

 Here are the different types of insurance available in the market. I will be judging them in terms of 5 Midas’ touch. The categories are Price, Payout, Ease of application. I will also write about the protection purpose of the particular insurance type:

 Category A: (Term Insurance)

 1. Term Life (Against death, terminal illness and Total Permanent Disability (TPD))
  •  It covers for a chosen period of time, usually up to a certain age - 65,70 etc. It does not have cash values.
  • There can be an option to convert term life to a whole life plan
  • A recommended coverage would be how long it will take your dependents (children) to reach an age where they can earn their income. 

 2. Term Personal Accident (Against loss of income due to an accident that results in loss of body parts, death, and permanent disabilities.)
  • It can also cover up to a certain age.
  • A recommended coverage amount should be around 5 times of your yearly expenses

 3. Term Critical Illness (Against loss of income or to seek alternate forms of treatment not covered by hospitalisation plans)
  • The payout would occur if the insured is diagnosed with a defined critical illness under the policy (It is possible that a critical illness occurs and there is no coverage because the critical illness does not fall in the definition 
  • A recommended coverage amount should be around 5 times of your yearly expenses
  • There can be features like coverage for early forms of critical illness (Stage 1, 2 cancers etc.), continued coverage after the first diagnosis.

 4. Hospitalisation ( Price - 2/5, Payout - 0/5, Ease of application 4/5, Against the cost of sudden hospitalisation due to many reasons)
  • This plan covers your hospitlisation fee upon checking into a hospital, up to a certain period after your discharge, up to a certain annual amount. 
  • You can opt for "better" coverage by paying more. The plan covers private hospitals too.
  • How you choose this plan would be highly dependent on your preference. It is hard for me to make a recommendation. For me, I would go for the private hospitalisation coverage. 

 #This plan is only appliable to Singaporean/ Singapore PR. 

 5. Loss of income (Price - 2/5, Payout - 3/5, Ease of application 3/5, Against daily living cost if you are unable to perform your original role due to an accident/illness)

 # I am unable to give an adequate opinion about this as I do not have this
You may look at this link if you want to:
https://www.moneyline.sg/disability-income-insurance/

 Category B: (Whole life / Participating Insurance)

 1. Whole Life ( Price - 5/5, Payout 5/5, Ease of application 5/5, Against death, accident, critical illness using riders)
  • As the name implies, this is a life plan that covers you for your whole life. 
  • There is also a cash value component to the plan as well. 
  • You can customise the plan to your needs by adding accidents, critical illness and multipliers riders to your plan.

 2. Endowment ( Price - 3/5. Payout 3.1/5, Ease of application 5/5, Think of it as a saving plan)
  • Essentially: You hand a sum of money to the insurance company every year, you will receive guaranteed and non-guaranteed return after a while. 
  • There are two major types in Singapore, one where you can receive "cashback" every year and towards the end of your policy, and the other where you receive return at the end of your policy or near the end of your policy. 
  • There are also death benefits to it (Usually 105% of the amount that you paid)

 3. Investment-linked policies - ILPs ( Price 5/5, payout 1.1/5, Ease of application 5/5, think of it as linking investment to insurance)
  • There are two components to this plan; Insurance (Which acts similar to a whole life plan) and Investment (Which you are able to choose mutual funds that you believe would give you good returns for your money)
  • ILPs can include attractive sign-up bonuses, loyalty bonuses - These differ from insurer to insurer, hence, I shall not talk about them. 
Thoughts and comments:
From my point of view, insurance should serve as a form of protection. If you wish to invest, you should take matters into your own hands and invest yourself. With that logic, you should choose the best price-coverage insurance, such that you may get the best protection for the least amount of money.


 Here are some of the objections that I have heard when I voice this opinion of mine to different insurant agents:
  1.  What if the company that you choose yourself goes bankrupt? Ans: What if I buy my insurance from you and your company goes bankrupt? If they try to convince you by saying that their company is AAA-rated and it will definitely not fail. Avoid them at all cost, they do not understand how these ratings work.  
  2. How do you know that your investment will make money? Ans: How do I know if I put my money with you guys that it will confirm make money? (Shameless reference to my active vs passive investment article. Do take a look at that)
  3. All the products in the market are similar because it is governed by MAS, there's no need to choose? Ans: Just run far far away. To compare insurance, you can use some of the websites available or seek advice from an independent financial consultant. They can help you compare insurance across different insurers. Compare yourself and see if there is a difference. 
  4. Would you do your own heart surgery? You need someone to be with you on this "journey" Ans: -Facepalm Even heart surgeons would not do their own heart surgery. 
Limitations of this post:
  • I have mostly dived into life insurance and not general insurance (Simply because I do not have a need to research into them.). 
  • I have written this post from the POV of someone that knows how to invest, the financial instrument out there to reach my goals and risk management. If you do not know all these things, I would recommend buying the endowment insurance rather than allowing your money to lose value to inflation
In my belief, you should learn to take your own personal finance into your own hands. I am speaking from my own personal experience, having family members cheated by insurance agents who preyed on their ignorance. That is one of the reasons why I started this blog, to teach you about finance and such that you may take your money in your own hands. 

From what I can see: there is a generation of more financially-savvy people entering the workforce who are more willing to understand their own finances. This would force insurers to come up with competitive/ more comprehensive policies. This would be great for consumers.

With that, 

Till next time, 
Stay vested, stay frugal my friends. 




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