Things you must know before you purchase any insurance
I am sure that everyone reading this has had some kind of exposure to insurances, but very few of us truly understand the difference in the types of insurances, the role, and the importance they play in helping us manage our risks.
The purpose of this article is to give you a crash course on Insurance as a risk management tool and also some of the considerations you should have when assessing any insurance on the market.
Types of insurance and their importance
To understand how important the different type of insurances is, you must first understand the concept of risks management.
Risk management is the process of identifying, assessing, and controlling threats to your financial wellbeing and progress. In the context of our finances, these threats range from high to low financial impact and high to low likelihood of occurrence.
High financial impact deals with threats that could jeopardize your financial plans and takes years to recover. Examples of which include the hefty hospital bills and loss of income-producing abilities because of an accident or illness.
Low financial impact deals with threats that are negligible and takes days or weeks to recover. Examples of which include minor personal accidents such as sprains and fractures which may cause a temporary increase in personal expenses.
Naturally, we should always dedicate our resources to deal with threats that are likely to occur and have a high financial impact as they can easily throw our progress and plans off.
Keeping that in mind, here are the different types of insurance and its importance based on the different type of threats that they address:
In order of importance:
Integrated Shield Plans – are designed to help limit and co-pay part of your heft hospital bills in an event of hospitalization.
Life insurance – is designed to help provide a lump sum in an event of death, disability, and critical illness. While there are no restrictions as to how you can spend the pay-out, the common use of life insurance is to replace your income or offset any liabilities in an event of your early demise or loss of employability due to critical illness or accident.
Personal Accident plans – are designed to provide a sum of money in an event of an accident. There are also miscellaneous benefits such as traditional Chinese medicine and chiropractic medical reimbursement, etc.
Hospital Cash plans – are designed to provide a daily “allowance” in an event of hospitalization.
Long story short, in the context of risk management, always prioritize both integrated shield plans and life insurance first. Personal accident and hospital plans are, in my opinion, good to have plans. If you have the budget for it but they are not a necessity.
Savings and investment insurance policies may or may not have a place in your portfolio depending on how you use them but do note that they are not designed specifically with risk management in mind due to their hybrid nature of savings/ investment and insurance.
Always compare your insurances
Though similar, no two insurance are identical. Why is there a need for MAS to issue over 17 Direct Life Insurance licenses if the insurance products offered by the different companies are identical?
Competition within the industry had caused the different insurance companies to “be the best” in the specific areas. The areas that the insurance company chooses to focus on will affect the type of benefits they provide and the cost they charge. As such, no one insurer is the best at every type of insurance.
As an advisor, I strongly advise against the laziness to not compare your insurances before you commit to it as a small difference in price over 20-30 years can amount to a large amount. It pays to just spend that extra effort to understand and compare the different options available before you commit to a long-term plan.
Who is your advisor?
In my previous article – Things you must know before engaging a financial advisor – I spoke about the importance of having an advisor that is on the same side as you instead of the company. You must understand:
Who is your advisor representing (Insurance agent, FA or IFA)
Why is your advisor recommending the products of a certain company
What is your advisor helping you with – financial planning or just insurance planning
You must view and consider your insurances alongside your entire financial plan instead of approaching the topic on an ad-hoc basis as your actions and decision towards your insurances will directly affect other areas of your financial planning.
Also, you must find an advisor who is on your side and have the capabilities to help you plan for your finances as a whole. Remember, your advisor should be your lifelong business partner that helps you manage, protect, grow, and preserve your wealth.
Long story short (and self plug)
When it comes to insurance planning, you must first understand the risks that you are facing today to match the right type of insurance to mitigate that risk.
Once you’ve narrowed down the type of insurance that you need to consider, it is time for you to compare the products across the different companies to identify the best company that can offer you the benefits you need at the lowest possible cost.
Remember, Insurance policies are generally long term commitments. A small difference of a few hundred dollars a year would add up to a large some when multiplied over 20-30 year period. Take some time to do your due diligence. It is worth it.
Now that’s where the self-plug comes in.
If you do not have the time, interest, or know how to identify the right type of insurance you should be considering as well as do the market research to compare the insurances across the different companies, you can reach out to me via telegram and WhatsApp and we’ll see what we can do together!
If you would like to view some of my past work relating to insurance planning, you can head over to my insurance planning page here.
In the following weeks to come, I’ll be publishing more guides - “the things you need to know before…” – relating to financial planning in general so do join my telegram channel to stay updated!
Daniel is a Licensed Independent Financial Consultant with MAS and a certified Associate Wealth Planner that provides advice in the following areas:
for investment and portfolio management advice - find out more here
for insurance planning and portfolio optimization advice – find out more here
for retirement planning advice– find out more here
This article is meant to be the opinion of the author and 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