Sunday, February 3, 2008

Importance of insurance

The road to a successful financial freedom can never be complete without taking care of one's insurance needs. Although you can be financially stable or wealthy all the while, if any major illness strikes you, that illness may cost you a fortune to recover and as a result reduce your total net worth. It is worser if you have to bear the costs of recovering for the rest of your life. Nobody wants to suffer such a financial burden.

Insurance is all about transferring of risks. Are you willing to take the risks of bearing all future medical costs if any illness strikes you? Certainly most financially savvy individuals are not willing to take that risk even if they are wealthy. By setting aside a portion of your savings in insurance, you can transfer most of those risks to insurers. Depending on the type of insurance that you sign up, any future medical costs or losses of income as a result of the illness can be compensated by insurers.

Now the next question is what type of insurance products should you take up? Let me just highlight what are the three most important type of products that should form part of one's insurance portfolio.

Hospitalisation and Surgical Insurance (H&S)
This is one type of insurance that allows payment to be made by medisave. This medical insurance plan is designed to help insured pay part of the large hospitalisation bills for treatment of serious illnesses or prolonged hospitalisation stay. Besides covering hospitalisation expenses, it also covers certain approved outpatient treatments, such as kidney dialysis, chemotherapy and radiotherapy for cancer treatment.

You need to note that even though this insurance covers all hospitalisation expenses resulted from illnesses, insured are subjected to pay co-insurance and deductibles portion of the whole bill. If you wish to have insurer pay for the co-insurance and deductibles as well, you need to sign up for a rider and pay additional premium in cash. With this enhanced coverage, insured do not need to worry about payment for hospitalisation expenses.

Overall the premium for this plan is cheap and is to be paid annually. It is advisable to sign up for the most expensive plan for bigger benefits limit and better option for class of hospitalisation stay. You can always downgrade in future if you think the premium gets expensive but any upgrading requires medical underwriting and subjected to approval.

Below I attached some of the plans available from various insurers:
AIA Healthshield Gold Prestige
Aviva MyShield
Great Eastern SupremeHealth
Manulife ManuCare
NTUC Enhanced Incomeshield
Prudential PruShield

Death / Total Permanent Disability (TPD) / Critical Illness (CI)
This is the most simplest form of insurance to understand but yet neglected by many. As the names suggest, you will receive lump sum payout in the event of death or TPD. You will also receive lump sum payout upon the diagnosis of one of the listed 30 CI like cancer, kidney failure, coma, stroke, etc.

All of the above coverage is attached when you sign up for term, whole life, endowment or investment linked policies insurances. However understanding each feature is essential before making a decision to sign up as they will affect your insurance portfolio in terms of cost, amount covered, duration of coverage, etc.

For example it is cheaper to get insured with term insurance which covers a period of lets say 20 years but you will not receive cash values at the end of the policy. For whole life you may need to pay higher premium for the same coverage but you may receive cash values when you surrender the policy.

You may want to read more on the following links to understand better.
Life Insurance Association(LIA) FAQ
LIA Glossary of Insurance Terms
LIA Insurance Protection Plans
Moneysense Guide to ILP

Disability Insurance (DI)
The purpose of disability insurance is to cover loss of income in the event of any illness or accident, in which a person is unable to perform his material duties for a continuous period defined by insurer. With this protection, insured will receive monthly payout if he/she becomes totally disabled. If insured is able to work but at a reduced capacity such that it leads to a reduction in pre-disability income, insured will receive a partial benefit depending on formula as stipulated by each insurer.

If you are struck with TPD, the advantage of this plan over receiving TPD lump sum payout is you are able to receive monthly income continuously until the policy expires. The total payout received can be substantial compared to the lump sum payout. For example, you may receive $2000 monthly for the next 20 years if you become totally disabled. That total amount is much higher than receiving a $100 000 payout.

Currently there are only 2 insurers in Singapore that provide this plan.
Great Eastern PaySecure
Aviva IdealIncome

Finally let me summarise the above write up in just a few statements. Wealth protection is essential and should come first before one tries to accumulate wealth. Without being insured when you are healthy at a younger age, you may regretfully realise the importance of insurance when you get older and ask why didn't I insure myself earlier? By then it is too late.

5 comments:

Mike Dirnt said...

a good comparison of hospitalisation and surgical insurance plans from MOH:
http://www.moh.gov.sg/mohcorp/hcfinancing.aspx?id=342

Mike Dirnt said...
This comment has been removed by the author.
Mike Dirnt said...

credit to pianolady from sgfunds for doing a comparison of shield and h&s plans:
http://spreadsheets.google.com/ccc?key=pRex1s_uwNQ69qpDqmC6gAA&hl=en

Lynn said...

Hi, i find that you didn't talk anything about personal accident policy. Any comment on that? :)

Mike Dirnt said...

Lynn IMO accident policies are crap

first of all if you are injured at work, you can claim from your company. and there is no such thing like insurability issue. because if you switch job, you will still be coverd for any accidents

secondly if accidents cause disability and loss of job, you can claim under DI. so DI is a subset of accidental policies

thirdly those that i mentioned are the basic insurances (especially H&D and death/CI/TPD). the others are some extra protection. so just get those that are necessary unless you got so much money to throw away