• Daniel Lee

Do You Really Save Money By Buying Insurances Later Rather Than Now?

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Does it make sense to hold off your insurance purchase?


How much would you “save” on your premiums if you were to buy it later and are there any costs involved?


In this video, we will unpack the numbers behind a common belief that purchasing insurance at a later date rather than now will provide you with monetary savings as you save on the years of premiums when you are uninsured.


I will be breaking this video into three parts

  1. hospitalization

  2. term life

  3. whole life insurance

and examine the viability, pros and cons of delaying the purchase for each different class of instrument.


 

1. Hospitalization Insurance

Given that hospitalization plans in Singapore operate based on a guaranteed yearly renewable basis.


The cost of insurance is not fixed based on the age of entry but instead increases based on your prevailing age when the premiums are due.



What this means is that there is no economic incentive to purchase your hospitalization insurance earlier as the cost that you will be paying in the future will not be affected by the timing of your purchase.


To give you an example, if you were to purchase a policy at 26 years old, when you are 36 years old you will be paying the same premiums as what another 36 years old individual would be paying if he or she were to purchase it then.


Looking from that perspective, there IS an economic saving by delaying your purchase as the cost of inaction is not reflected or priced in the premiums that you will be paying in the future.


That said, what is the risk or downside of delaying your hospitalization insurance purchase?


While the cost of inaction is not reflected in the premiums that you are or would be paying, the most significant risk and downside of delaying your hospitalization insurance purchase come from the angle of insurability.


What this means is that in an event where you suffer from any illness or accident prior to obtaining the coverage, these conditions that you suffer from will be classified as pre-existing conditions and would most probably be excluded completely from the coverage itself.


For example, if my intention is to purchase my hospital insurance after 30 years old and I suffer from a back injury during an exercise back when I am 27 years old.

While I may have recovered, the back injury would be considered to be a pre-existing condition and the insurance company might exclude any back-related conditions or treatment.


An example of such an exclusion for the above example is as follows:



Long story short, while there are actual premium savings by delaying your purchase, you are risking your insurability which may result in the full exclusion of any pre-existing condition before your purchase.


Does it make sense to save a few hundred of dollars a year just to be excluded from thousands of dollars of potential treatment in the future? Weigh the odds yourself.


 

2. Life Insurance

Unlike hospitalization insurance, there is an economic incentive to purchase your term and whole insurance earlier as opposed to later as the cost of insurance is locked in based on your age of entry.


What this means is that the earlier you purchase your life insurance, the cheaper the yearly premiums would be.


The key question, however, is how much cheaper would it be to purchase life insurance earlier than later and will the increase in cost outweigh the potential premiums saved by delaying the purchase?


To answer this question, we will have to look at the subcategories of life insurance separately.


2.1 Term Insurance

On the topic of term insurance, these are the prevailing yearly premiums for the same level of coverage amount and expiry age.



What you would realize from this table is that while the number of years payable decreases, the higher the yearly premium payable increases the longer you delay your purchases.


In this case, the increase in yearly premiums due to an older age of entry far outweighs the premiums that could have been saved during the years when you are uninsured as seen from the total premiums paid which only increase as you delay your purchase decision.


If you are wondering how much would your premiums increase for every year you choose to delay your purchase decision, the answer to that question is 6%.



The cost of insurance will increase at 6% compounded for every year you choose to delay your purchase as a result of a higher age of entry.

Add in the risk of insurability, it does not make sense for you to delay your term life purchase as you will end up paying 6% more a year AND risk losing the coverage in an event where you have pre-existing conditions.


 

2.2 Whole Life Insurance

On the topic of whole-life insurance, these are the prevailing yearly premiums for the same level of coverage amount and expiry age.



What you would realize from this table is that while the years payable remains the same, the longer you delay your insurance purchases, the higher the yearly premium payable increases.


In this case, there is no economic incentive to delay your decision to purchase whole-life insurance as it does not reduce the years payable and you would only end up paying a higher yearly premium.


This will inevitably push the total premiums paid higher for every year you delay your decision.


If you are wondering how much would your premiums increase for every year you choose to delay your purchase decision, the answer to that question is 2.6% to 3%.



The cost of insurance will increase from 2.6% to 3% compounded for every year you choose to delay your purchase as a result of a higher age of entry.


On top of just the higher cost of insurance, for the whole-life plan, your cash value behaviour is also affected by your decision to purchase the plan earlier versus later.


In fact, the estimated surrender value decreases the later you purchase your whole life insurance.



From a percentage perspective, for every year that you delay your whole life insurance purchase, the estimated surrender value that you will receive in the future decreases by 2% to 4%.



In short, considering the risk of insurability as well as the fact that you will be paying more in premiums for the same duration and receiving less in surrender value, it does not make any economic sense for you to delay your purchase.


 

Summary

So, there you have it, from the quantitative analysis of the three major insurance instruments, the conclusion that we can derive is that:


For hospitalization insurance, while there is an economic incentive to delay your insurance purchase, the cost savings might not be worth the additional risk that is borne in the form of insurability.


For term life insurance, there is no economic incentive in delaying your insurance purchase as the cost of insurance increases by 6% a year as well as the risk of insurability.


For whole life insurance, there is no economic incentive in delaying your insurance purchase as the cost of insurance increases by 2 to 3% a year while the surrender value receivable decreases by 2% to 4% a year ON TOP of the risk of insurability.


This is why I always encourage everyone to get their insurance done up as soon as possible.


If you do not know how to get started or if you do not have the time to do your market research, you can consider engaging an Independent Financial Advisor who can help you make sense of the market and shortcut your insurance planning process.


To find out more information about how you can benefit from my financial and insurance planning services, you can check out what I do on my website here:

Or reach out to me directly via:


Daniel is a Licensed Independent Financial Consultant with MAS and a Certified Financial Planner (CFP®)


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Disclaimer:

This article is meant to be the opinion of the author

This article is for information purposes only

This article should not be seen as financial advice

This advertisement has not been reviewed by the Monetary Authority of Singapore


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