Tuesday, October 26, 2010

Seek cover when you're young

my paper
By Reico Wong

MENTION the word "insurance" and most people tend to yawn, change the topic or, in some cases, literally vanish.

It is undeniable that the subject becomes unbearable when pesky insurance agents descend on you and try to shove different products down your throat.

However, the benefits of getting insured is apparent in the long term, as adequate insurance coverage is a necessity.

The time to seek cover is when one is young and healthy, as insurers grant full coverage and at a lower premium.

But, more importantly, insurance coverage is critical as one's future is unpredictable.

Individuals will also want to think about their dependants - parents, as they become older and unable to work; one's spouse, who may be tied down by financial obligations like home-mortgage and other personal loans; and one's children, to fund their education.

Besides death, other tragedies can occur. Then, hospitalisation and health-care bills will be an immense burden. You do not want to drain your loved ones' savings.

Life insurance is one of the most basic, yet critical, types of policies you should have.

Life insurance is a contract between an insurer and a policyholder, where the insurer agrees to pay a designated beneficiary a sum of money upon the contracted individual's death and, in some cases, if the individual becomes critically ill or suffers from a permanent disability.

In return, the policyholder pays a stipulated premium, either at regular intervals or in a lump sum.

According to the latest statistics from the Life Insurance Association of Singapore (LIA), the industry paid out a total of $1.85 billion to policyholders and beneficiaries as of end June.

Of this, $210 million was related to death, critical-illness or disability claims, while the remaining $1.64 billion went to policies that had matured.

With more than 140 registered insurers in Singapore offering a wide variety of life-insurance policies, it is no surprise that even those interested in the product may feel overwhelmed and not know where to start looking.

Issuers say a variety of factors determine the type of insurance policy and extent of coverage one should look for. These revolve around one's age and the stage of life one is at, including marital status, children, medical history, earning capacity, goals and anticipated financial needs.

For example, a person in his 20s to 30s who is unmarried would typically be focused on building his career and on asset accumulation.

With his financial resources in the foundation phase, his main concerns should be in the areas of accident and disability protection, as well as on investment.

On the other hand, a married couple in their mid-30s to early 40s with children should be more focused on wealth accumulation and enhancement. They should look towards family security and debt cancellation, focusing not only on the same aspects as those in their 20s to 30s, but also on the long-term care and welfare of dependants.

"A person's sum assured (or the insurance coverage needed) should be roughly 10 times of his annual income, as a rule of thumb," said insurer Great Eastern Holdings.

The company pointed out that term-insurance plans, the cheapest among the various types of life insurance, can cost less than $50 each month. Whole life-insurance policies, meanwhile, cost much more because they offer longer-term protection and have an investment component.

The LIA points out that individuals should expect to receive three documents from their financial advisers at the point of sale - a guide to life insurance, a product summary and a benefit illustration.
It also advises that individuals purchase insurance policies on a needs-driven basis, and always after conducting a cautious analysis of financial status and the ability to pay long-term regular premiums.

While individuals can choose to cancel or switch insurance policies, this must be done wisely as premiums paid will not be refundable, and there are typically penalties imposed on policyholders for early policy termination.
Individuals switching from one policy to another might also want to ensure that they do not cancel the original policy until the new one is in force - you do not want to be left without coverage, especially for a long period of time.
While there is no cap to the number of life-insurance policies an individual can buy, critical-illness and permanent-disability claims is subject to certain benefit caps. Multiple claims cannot be made if coverage is on a reimbursement basis.

Financial advisers' track record should be also evaluated, not just the range of products offered.
Other tips the LIA suggests include not taking up any policy if you are unsure of its scope and functions, as well as insisting on having all documents.



ALSO known as ordinary, permanent or straight life insurance, this type of policy provides life-long protection that pays out a benefit to a contracted individual's beneficiaries upon the policyholder's death.

Such policies sometimes also cover critical illness and permanent disability.
It typically also has an investment component, which builds up cash value that the policyholder can withdraw or borrow against to meet future goals.
Note that the rate of returns here may not be as competitive as other investment alternatives.
Often, such policies allocate more money as one ages to the mortality component, while what goes into the investment portion is reduced over time.

This is a pure protection plan that covers a contracted individual for a fixed period of time.
The benefit is specific, and will be paid out only if a policyholder's death occurs within the specified time period.

Premiums for term insurance are usually lower than those for a wholelife policy, and such policies offer higher coverage for most people, except for those advanced in age.

This is due not only to the shorter time period of insurance coverage, but also because the policy does not have an investment component.

Variable life policies are like whole life policies, except that they allow more flexibility in the investment component.

A contracted individual is able to choose from a range of investment options within an insurer's portfolio, such as stocks, bonds and certain types of funds. The insurer often manages these investment products itself, collecting a fee.
Financial planners, however, warn that such policies are only for riskoriented individuals and those unlikely to need to tap on their savings on a short notice.
Variable returns fluctuate with the direction of financial markets and, if the markets plunge, the cash value portion of the policy will be severely affected.

Universal life policies allow a contracted individual to review and shift money between the mortality and investment components. The cash value of investments can thus grow at an adjusted variable rate.
Most of such policies also guarantee a minimum interest-crediting rate.
The policyholder can also adjust the premiums as his circumstances change.

Although highly flexible, universal life policies have certain drawbacks. If you choose to pay lower premiums at certain times, you might have to pay higher charges later on. The alternative is to drop the policy and withdraw the cash value you may have built up. But, if you drop the policy early, you will have to pay a surrender charge.

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