4 Different Insurance Types

Everyone in Singapore knows something about life insurance. Some know a little, others know a lot.

Whether or not you know a little or a lot, I believe that what I share here will still be useful. It will either validate or, add on to what you already know about life insurance.

I shall focus on the four main types of life insurance.

Using an example, a brush can be used for different purposes like painting a wall or an art piece etc. At the same time, the brush can be made of different materials like plastic, metal, wood etc. Similarly, life insurance can be used for different purposes like protection, retirement etc. Life insurance itself can be either of four different types – Whole Life, Term, Investment-Linked, and Endowment.

Whole Life

This type of life insurance is as its name suggests. It protects the person for whole life. It also has a monetary value. This means that if you were to surrender it, or what people commonly say “cancel it”, you will receive a lump sum of money back. Depending on how many years you have kept the policy, this lump sum can be the same, or more than what you have put in.

A common misconception with this type of insurance now is that because it is a Whole Life type, you have to be paying premiums every year for your entire life. Whole Life type products have evolved. Now, you can choose to only pay for 15 years, and yet enjoy whole life coverage. The key thing to remember is that there are more options.

Another common misconception with this type of insurance now is that it should not be purchased because it gives a low rate of return when you surrender it. Does this type give a low return rate upon surrender? Yes, it does. However, there is an error here that I want to highlight.

First, imagine someone who has just used the toilet saying this “I don’t want to wash my hands because the water is too cold”. Yes, there is something not right with what this person is saying. You wash your hands to keep it clean. The temperature of the water should be of a lesser concern.

Similarly, the reasons to purchase Whole Life type insurance should be for the coverage whilst the person is living and for the guaranteed lump sum payout upon death. The surrender value should be of a lesser concern. Endowment policies, stocks, ETFs, and other investment products should be considered if the rate of return is your priority.

Term

This type of life insurance is as its name suggests. It protects the person for a limited term of time. Past that term, coverage ceases. This type of life insurance does not have any value. You will not get any lump sum of money back when you choose to surrender it. You can choose to surrender it at any point of time.

This type of life insurance is very good for getting high coverage with low premiums paid. Term type life insurance should always be considered to beef up the life insurance portfolio especially when you have many commitments (e.g. House) and dependents (e.g. Children) to look after. Unless you have tons of money and can afford to rely solely on Whole Life type insurance, it is my suggestion for you to consider having a mixture of Whole Life type and Term type insurance in your portfolio.

It is common for there to be a debate on which is better – Term type versus Whole Life type. Ultimately, Term type and Whole Life type insurance are merely tools used for managing risk. There is more value in understanding the benefits each bring about, and knowing the amount of risks you are managing. If you really want to satisfy your curiosity, look for your financial planner and ask for a table comparison of the two types.

Investment-Linked

Some people refer to this type of life insurance as a Whole Life type. I want to say that it is different from the Whole Life type I have described above.

For this type, you are buying into a fund by either paying premiums annually or monthly. This amount that you are paying either annually or monthly is fixed at a certain amount. You are allowed to choose the funds that you buy. There are management fees and distribution costs involved.

Where does the protection come about? From the fund units that you have purchased some will be sold every year to be used to pay for insurance charges. The insurance charges are not fixed. The insurance charges increases and gets more expensive according to your age.

Come a point of time (usually when a person is in his mid-fifties), the annual insurance charges would probably be more that the annual premiums put in.

There is often a debate yet again on the returns of this type of life insurance. Insurance should be purchased for the protection element. The returns of an insurance purchase should mostly be secondary.

This type is good in my opinion up till when a person is in his fifties. That’s when the insurance charges are still manageable, and could even be considered cheap for the amount of protection coverage. It is also good because it allows you to take premium holidays. It means that as long as there is enough value in the fund units, even if you don’t pay premiums sometimes, your protection coverage will still be there. This is good for people with cash-flow problems.

For people who don’t understand what I just described, stick to a mixture of Whole Life type and Term type of life insurance.

Endowment (Savings)

This is a type of life insurance in which emphasis is placed on the returns more that the coverage. This means that the returns are higher, and the protection coverage is much lower. Endowment plans usually give you an annual yield of between 2% – 3.9%.

This means that at minimum you should let your money accumulate at a rate of 2% because this is much higher than leaving your money in the savings account with the bank!

If your concerns are returns, consider these types.

The savings plans being sold at banks are essential endowment type life insurance created by insurance companies. The banks are merely a distribution platform.

There is more value in purchasing endowment policies from insurance agents because they can advise you how to bundle and purchase other necessary life insurance products at a cheaper price.

The common argument with savings plans is that the policy term is too long and there is lack of liquidity, or that the returns are too low compared with other investment instruments etc.

There are so many instruments out there. A savings plan is one of the many. There is never a ‘best’ one. It all depends on your risk propensity, needs, and time frame.

Everyone wants the safest investment with the highest return with the most liquidity. There is no such thing.

Distribute your money across the range of instruments. Ensure that your money is growing at a minimum of 2%. Understand the different investment products’ characteristics, and how it helps you.

How should I prioritize my protection needs?

Probably you already know that you have to transfer some risks of health and injury to the insurance company. Sometimes insurance may appear to be really complicated and complex, with many tables filled with much numbers and percentage and decimals. Also, the representative may be saying lots of things, on and on, non-stop, like a machine gun, it appears that everything is important! Ok, so maybe everything is important, and, which exactly are more important and which should you choose to assess right now?

Let me provide a guideline.

Reimbursement Basis

Nobody likes to use their own money to pay for something. Maybe that was a sweeping statement. I think most people don’t like to use their own money to pay for something. What do you think?

When a person stays in the hospital, visits the clinic, or sustains an injury and goes for a medical scan at the hospital, in all of these scenarios medical expenses are incurred.

Who pays for these expenses? The answer is You. What if you could be reimbursed, or should I put it simply, be paid back for all these expenses? Would you want it?

And so, the first step would be to choose all the insurance that covers medical expenses. This would typically be the hospital shield plans and the accident insurance (make sure it covers for medical expenses).

Compensation Basis

Income is possibly the most important practical thing to a family. If this income is lost, meaning if the breadwinner falls sick or is injured and cannot work, how much do you think the family would want to be compensated? For how long? This is an aspect of protection most overlooked by people.

A terrible illness or injury when it hits us would cause some pain, some discomfort, some unhappiness, grouchiness, or sadness.

The question is if we were compensated for whatever we felt, how much would we want? Imagine. You’ve lost the small toe of your right foot, but you were compensated $10,000. Would you feel better? No? How much is enough? Imagine. You were hit with a terrible illness, and because of that, you’ve lost your direction in life, you feel depressed about life. If because of that, you were compensated $100,000, this amount of money could be used to pay off some of the housing loans; it could contribute to part of your child’s education, it could be used for you to travel to a nice destination to re-think about life. Would you feel better? No? How much is enough?

Death comes to us all. The only fear could be that death comes too early, and we leave people we care about in the land of the living. These people could be our children, our spouse or our parents. What is the impact of your death? Would it cause them to be unable to pay for the house mortgage, or university education, or living expenses? How much do you want your family to be compensated for your death? Do you think they should be compensated?

And so, the second and last step would be to think about how much you would want to be compensated for all the bad events that happen to you or your family.

Should I compare the products of different insurance companies?

How much is the premium? Is this the best product in the market? That company has this feature, does yours have it also?

Many consumers have these questions in their minds. These are very valid and important questions. It is easy to understand why a typical consumer would want the answers to these questions. I encourage people to ask questions. It shows that they are keen to know more about the value of the things they purchase.

An insurance company is a profit-generating business. It sells products that are beneficial to the public. Still, there is no running away from the fact that it is a profit-generating business. There are several insurance companies in Singapore. Each of them is competing for market share. What this means is that each of them is always trying its best to come up with products which are better that its competitors. The products could be better in terms of price, it could be better in terms of coverage. These are the two aspects insurers always compete on – Price and Coverage. The guiding principle is “You pay for what you get”. This means that cheap, doesn’t mean it’s good.

Insurance is a unique product. It is not a product that is used and tossed away. When you purchase slippers, after it is spoiled you throw it away and look for a new, good pair of slippers. However for insurance, it is something you commit to for a long time. What this means is, once you choose to commit to a product, even if a similar but new and better product is launched the next year, you can’t just throw away the one you have and change to the new one.

I would like to share a perspective. I would like to propose that instead of chasing to see which company has the best products, I advocate chasing and sourcing for a good Financial Planner. This person will focus on your needs. New products could be launched every year, they may be different. The insurers may be strenuously competing with each other. You may or may not want to know all about their competition. The thing that you do know for sure is that your needs doesn’t change every year. It might change from time to time, but it doesn’t change every year. What you may want is a Financial Planner who knows about how the policies and economy in Singapore are changing, and how to make use of the products you already have to lead you to fulfil your needs.

Compare the Financial Planners instead of the products. Choose someone you are willing to work with. Choose someone you trust. Choose someone who is patient in listening.

3 reasons for working with Financial Planners

Personal finance is a private affair, not something one would share about easily with another person, especially a stranger. Majority of Singaporeans feel that they are the best persons to handle their own money. This sounds perfectly logical. Still, I would like to suggest 3 reasons to support working with Financial Planners.

Reassign

Singapore could now be considered a first world country. The immediate implication is that its citizens experience first world problems.

One major problem is the competition for time. A tourist once shared with me her observation of Singaporeans. We always seem to be rushing from one place to another. That observation is real. We are always rushing for time. Our jobs demand a huge bulk of our time. It takes time and effort to build a good, strong family. We are always looking to take time off to travel, or to pursue our hobbies.

It takes time to plan our own finances. Planning it on our own is an option; in fact it is the best option because you would know what you want best. One consideration: Taking out time to monitor our finances, would mean lesser time for other activities.

Now. Close your eyes. Dream a little. Imagine the things you like to do, that holiday you’ve been planning, your children who are yearning for your time, your chill-out sessions. Would you rather do that, or take time to research and plan your own finances?

Consider reassigning this work to Financial Planners. Go, enjoy, and live your life.

Resourcefulness

As a country progresses, it is inevitable that change will occur. Policies might change. Inflation rates might change. Cost of living might change.

An example would be our CPF system – Minimum Sum, CPF Life, Drawdown Age. There has been quite a bit of change since the last ten years. I do not want to comment on whether the system is good or bad. What I do want to highlight is that as a citizen having to  live through adjustments in policies and economy, change is inevitable. In order for our personal financial planning to be relevant, we have to keep track and understand what these changes are.

A Financial Planner is always keeping up with these changes. He reads up on the changes to understand what they are. For example, CPF Life is an annuity scheme that every Singaporean is involved in. However, how many actually read up on it?

Consider tapping onto a Financial Planner’s resources. It is his duty and job to keep up with these changes. He does this day in and day out. Just as you are proficient at your scope of work, a Financial Planner is proficient at his.

Relationship

In Singapore, one has to go through an insurance representative to purchase insurance. This representative is obliged to service the insurance plan purchased. Thus, a relationship is established. This relationship is unavoidable, welcomed or not.

Financial Planners rely heavily on insurance to craft out a plan. Look for a representative that is also a Financial Planner. An insurance salesman is not necessarily a Financial Planner. Look for a pleasant person who is genuinely concerned for you, the plans you made, your outlook towards life, your family, and your financial situation. It marks the beginning of a long relationship, whether business or personal.

Is your insurance representative a Financial Planner?

Risks associated with ill health and injury

Most Singaporeans desire to live a life of quality. In my own opinion, I think living a life of quality means doing your job well, respecting the people around you, treasuring the time you spend with family and friends, and learning to appreciate the special moments in life. It also means a certain standard of living that you have chosen and are working hard towards having. It is all a matter of your own choosing.

In order to protect this quality of life, you would need to understand the risks that may cause changes to it. I want to emphasize on understanding these risks. I do not mean to create fear. Rather, I hope to promote awareness so that well-informed choices can be made.

Hospitalization

Medical costs are getting more and more expensive. This is understandable, as the medical technology in Singapore is also getting more and more advanced. While we appreciate how well our doctors can treat us, we also need to know that a hospitalization will cost us a considerable amount of money.

I’ll illustrate such costs using the example of the treatment of cancer.

Imagine a person falls sick, and visits the local doctor. The doctor suspects that the patient’s condition is quite serious and refers the person to the hospital. The patient gets warded into hospital and stays in a room and bed, tended by nurses, and a doctor. Laboratory tests are done. Cancer is diagnosed. Subsequently, chemotherapy and radiotherapy sessions are scheduled, and medicine is prescribed. After a long period of time, the patient recovers and goes back to work.

There are several stages briefly mentioned in this story, and they all have costs to it. Some of them are inpatient costs, some of them are outpatient costs. It is prudent to understand the costs associated with the treatment of various illnesses, serious or not, so that we can set aside resources in case it happens.

Loss of Income

An area that is often overlooked by Singaporeans is the risk of loss of income.

Imagine this scenario.

A father brings home a monthly income. This income is used to pay for food, clothing, tuition fees, utilities, holidays, and presents, just to name some basic monthly expenses. What happens when this income is removed because the father is unable to work due to an illness or injury? The family would probably have to take money out of their savings to afford the monthly expenses.

It is often recommended that 3-6 months worth of a person’s monthly income be kept aside as emergency funds, just so that there will be no drastic change in lifestyle for at least 3-6 months. It provides some buffer time to plan for what to do next.

Critical Illness

When a person gets hit in life with a critical illness, yes, treatment is needed. We may also want to consider how it can impact a person such that he is affected emotionally, psychologically and spiritually.

There is worry on how to look after the family, how to afford the child’s education, there is frustration and sadness, possibly even anger, on why this unfortunate event has happened. There could even be questions on why God, if he exists, allows such an event to happen. It also affects a person’s motivation to live life, to overcome the odds, to look at life positively,

Accidental Injury

Accidents occur all the time. It can be a small accident like a sprain whilst playing basketball, or a serious one like a traffic accident. Many serious injuries could result from accidents. I shall not go into gory details on the kind of injuries that could result as the news is full of it. A serious injury could result in a similar impact as mentioned for a critical illness, in its effect on a person emotionally, psychologically and spiritually.

When recovering from an injury, a person needs help. This is in the form of physiotherapy sessions, or traditional Chinese massages, or special movement aids. There could be other things. Another person might even need to be present to assist in movement, or other basic activities.

It is helpful to think through what are the help, or equipment needed when a person is recovering from an injury, or re-adjusting back to life.

Death

Death is simple. It is simply passing into the next thing, phase, dimension, or place. When death occurs, there is no need to make and plans or worry about the quality of living. I’m sure life after death is good.

The only consideration would be the people left behind in the land of the living. Would their lives change? How would it change? Is this change desirable? Can this change be managed?

What to do next?

Ultimately, we are only humans, made of flesh, filled with emotions, yearning for a life directed with a sense of purpose, accompanied by friends and family who love us. There is a limit to how much we can micro-manage the impact brought about by the storms of life. We can only try our best, and the first step to trying our best is to know the different kinds of storms out there.

Small Boats and Insurance

There was this master shipbuilder, who was given the opportunity of a lifetime. He was chosen by a wealthy merchant from amongst hundreds to be in charge of building a ship. This ship was to sail across the Pacific Ocean. Immediately he set off to make plans, sourcing for materials, engaging draftsmen, naval architects, builders and so on. After some time, the ship was completed and it was time to test her sea-worthiness. The wealthy merchant came on-board to inspect the ship he had commissioned. As he walked around he noticed that there were small boats fixed to the sides of the ships. Curious, he asked the master shipbuilder why they were there.

Wealthy Merchant: “Why are small boats attached to the sides of my ship?”

Master Shipbuilder: “In case a serious storm wrecks the ship, the small boats will allow the people to escape to safety”

Wealthy Merchant: “And why isn’t my ship designed to withstand storms??”

Master Shipbuilder: “Oh! It certainly is designed to withstand all kinds of storms. Still, your life is so important that we have to provide an escape plan just in case a storm does wreck the ship.”

Upon hearing that his life was treated with utmost importance, the wealthy merchant was satisfied. The ship eventually sailed the Pacific Ocean countless times, and the small boats were never used. Still, they were never removed.

We are all master builders of our own lives. There is a certain quality that we seek to have, and we work hard to achieve it. As our lives are very important, life insurance is like a form of small boat to allow us to escape the storms that life throws at us. Still, we definitely hope that we never have use for it.

The moral of this story is to share that life insurance by itself is valuable. It might not be very interesting, but it is important to learn about. Fortunately or unfortunately, Singaporeans only have access to life insurance through representatives. Do not let the fading stigma associated with representatives deter you from learning more about insurance.