Thursday, September 06, 2007
Insurance Demystified – Part II
In my previous posting on ‘Insurance Demystified’, I had mentioned that insurance is a form of risk management tool which aims to hedge against the risk of a loss that might have severe consequences by transferring the risk from one entity to another in exchange for a premium.
Therefore, any risk that can be quantified can potentially be insured. There are so many different types of insurance in the market that serve the varied risk management needs. The following list is not exhaustive and is intended to highlight the more common types of insurance with regards to personal financial planning.
Term Insurance
This is the most basic type of life insurance. By paying a small premium, the insured is covered against death and total permanent disability (TPD) for a specified period and for a certain amount of sum assured. Such term policy is purely for protection as the premiums are fully expended and none of it is used to build up any cash value.
Term policies can be further classified into level/straight term, decreasing term, increasing term and variable term. There might also be optional payable features such as convertible, renewable and critical illness riders that can be added to the main term plan to improve the attractiveness and coverage of a term policy.
Whole Life InsuranceSuch a policy offers protection against death and TPD to the insured for his/her entire life or up to the age of 100, whichever is earlier. Unlike a term plan, a whole life policy has a cash value as part of the premium is invested to reap returns.
Whole life plans can also be further classified into participating, non-participating, fixed premium, limited premium or continuous premium payment plans. There are also optional payable features such as critical illness, hospitalisation benefit, accidental benefit, payer benefit and other benefits that can be added to the main plan to enhance the policy coverage.
Endowment Insurance
The main purpose of an endowment policy is for savings rather than protection. There will be some amount of coverage albeit it being quite minimal, as the bulk of the premiums is invested for returns.
Such a policy will have a maturity date and the maturity value, which is the total of the guaranteed plus non-guaranteed returns which will be paid to the insured when the policy expires. Endowment policies are most commonly used for retirement and children’s education planning.
As with other term and whole life plans, endowment policies also offer optional payable features such as critical illness premium waiver, payer benefit and other riders to be added to the main plan. There are single premium, regular premium, participating as well as non-participating endowment policies.
Investment-linked Policies (ILP)Such policies offer a combination of protection and investment with part of the premiums (less all charges) being Invested into various investment funds of the insured’s choice.
As the investment funds are being chosen by the policy owner, the risk is being borne entirely by the policy owner. ILPs are more flexible as compared to traditional policies as premiums can be reduced or stopped temporarily as long as there is sufficient cash value. It is also possible to increase (subject to insurability) or decrease the sum assured, top up the premium so that more monies can be invested without having to purchase another policy or do partial withdrawals of the cash value.
Annuities
Such an instrument offers life-long regular payouts to annuitants for as long as they are alive. Premiums are to be paid before the first payout commences so as to allow the insurer sufficient time to build up enough funds to service the lifetime payouts.
Annuities are used for retirement planning to hedge against the retiree from outliving his/her resources. As capital preservation is of utmost importance, the premiums are mostly invested in lower risk instruments such as government securities and investment-grade bonds. There are many different forms of annuities such as single life immediate, term certain, guaranteed, reversionary, joint-life and joint-life & survivor annuity.
Health Insurance
Therefore, any risk that can be quantified can potentially be insured. There are so many different types of insurance in the market that serve the varied risk management needs. The following list is not exhaustive and is intended to highlight the more common types of insurance with regards to personal financial planning.
Term Insurance
This is the most basic type of life insurance. By paying a small premium, the insured is covered against death and total permanent disability (TPD) for a specified period and for a certain amount of sum assured. Such term policy is purely for protection as the premiums are fully expended and none of it is used to build up any cash value.
Term policies can be further classified into level/straight term, decreasing term, increasing term and variable term. There might also be optional payable features such as convertible, renewable and critical illness riders that can be added to the main term plan to improve the attractiveness and coverage of a term policy.
Whole Life InsuranceSuch a policy offers protection against death and TPD to the insured for his/her entire life or up to the age of 100, whichever is earlier. Unlike a term plan, a whole life policy has a cash value as part of the premium is invested to reap returns.
Whole life plans can also be further classified into participating, non-participating, fixed premium, limited premium or continuous premium payment plans. There are also optional payable features such as critical illness, hospitalisation benefit, accidental benefit, payer benefit and other benefits that can be added to the main plan to enhance the policy coverage.
Endowment Insurance
The main purpose of an endowment policy is for savings rather than protection. There will be some amount of coverage albeit it being quite minimal, as the bulk of the premiums is invested for returns.
Such a policy will have a maturity date and the maturity value, which is the total of the guaranteed plus non-guaranteed returns which will be paid to the insured when the policy expires. Endowment policies are most commonly used for retirement and children’s education planning.
As with other term and whole life plans, endowment policies also offer optional payable features such as critical illness premium waiver, payer benefit and other riders to be added to the main plan. There are single premium, regular premium, participating as well as non-participating endowment policies.
Investment-linked Policies (ILP)Such policies offer a combination of protection and investment with part of the premiums (less all charges) being Invested into various investment funds of the insured’s choice.
As the investment funds are being chosen by the policy owner, the risk is being borne entirely by the policy owner. ILPs are more flexible as compared to traditional policies as premiums can be reduced or stopped temporarily as long as there is sufficient cash value. It is also possible to increase (subject to insurability) or decrease the sum assured, top up the premium so that more monies can be invested without having to purchase another policy or do partial withdrawals of the cash value.
Annuities
Such an instrument offers life-long regular payouts to annuitants for as long as they are alive. Premiums are to be paid before the first payout commences so as to allow the insurer sufficient time to build up enough funds to service the lifetime payouts.
Annuities are used for retirement planning to hedge against the retiree from outliving his/her resources. As capital preservation is of utmost importance, the premiums are mostly invested in lower risk instruments such as government securities and investment-grade bonds. There are many different forms of annuities such as single life immediate, term certain, guaranteed, reversionary, joint-life and joint-life & survivor annuity.
Health Insurance
Medical costs are rising and health insurance provides some protection against financial hardship in the event of costly hospitalization bills and treatments arising from an accident or illness. In Singapore, the government has implemented programs such as Medisave, MediShield and Medifund to make health care affordable.
Despite that, the Medisave and MediShield schemes might not be adequate or comprehensive enough due to certain restrictions and limits on use as well as the deductibles and co-insurance features within the schemes.
Hence there are many private health insurance plans that are available to enhance one’s coverage and provide for hospital and surgical benefits, hospital cash, dental, out-patient, overseas medical coverage and other benefits not included in the government plans.
For employee-benefit health care plans, the introduction of Portable Medical Benefits Scheme (PMBS) and Transferable Medical Insurance Scheme (TMIS) have improved the mode of coverage such that employees can continue to enjoy health coverage even after the termination of employment (up to 12 months) and when they are in between jobs.
Such continuation in coverage will limit the risks of un-insurability or exclusion of pre-existing medical conditions that could exist if employees have to reapply for new plans when they change employment.
Critical Illness Insurance
This type of plan will pay out the sum assured upon the insured contracting or suffering certain critical illnesses specified in the policy.
In Singapore, most policies cover at least 30 forms of critical illnesses such as heart attack, stroke, cancer, coronary heart disease, kidney disease, major organ transplant and others (subject to specific terms in the policy document that define what constitute the critical illnesses that are being covered).
Such critical illness coverage can be offered as a standalone plan or it is often added to a life policy as a payable rider.
Disability Income Insurance
Such a policy is designed to pay the insured a regular income in the event of disability. From a financial perspective, the effects of total and permanent disability may be worse than death because not only will the person be unable to support the family, he/she will require financial support which might exacerbate the financial burden already imposed on the family.
Disability income insurance is different from total and permanent disability (TPD) benefit as the latter’s sum assured is normally equivalent to the death benefit and upon TPD occurring, the proceeds are either paid in a lump sum or in installments. TPD is commonly defined as being unable to perform any occupation or if the insured loses his/her hearing or sight or both feet or hands etc.
As for disability income insurance, the monthly benefits are subject to a maximum of 60-80% of the pre-disability income. And the commonly adopted definitions for disability income insurance are (1) if the insured cannot work at any occupation; (2) if the insured cannot work in any occupation for which he or she is or might be qualified for, in which event, factors like the insured’s training, education and experience will be taken into account; or (3) if the insured cannot work in his or her own occupation.
These are the common types of life and health insurance that provide useful and economical solutions to potential problems in the risk management process of personal financial planning.
There are also general insurance products that are related to assets and liability protection – such as motor, home, travel, professional indemnity insurance etc which I will touch upon subsequently
Despite that, the Medisave and MediShield schemes might not be adequate or comprehensive enough due to certain restrictions and limits on use as well as the deductibles and co-insurance features within the schemes.
Hence there are many private health insurance plans that are available to enhance one’s coverage and provide for hospital and surgical benefits, hospital cash, dental, out-patient, overseas medical coverage and other benefits not included in the government plans.
For employee-benefit health care plans, the introduction of Portable Medical Benefits Scheme (PMBS) and Transferable Medical Insurance Scheme (TMIS) have improved the mode of coverage such that employees can continue to enjoy health coverage even after the termination of employment (up to 12 months) and when they are in between jobs.
Such continuation in coverage will limit the risks of un-insurability or exclusion of pre-existing medical conditions that could exist if employees have to reapply for new plans when they change employment.
Critical Illness Insurance
This type of plan will pay out the sum assured upon the insured contracting or suffering certain critical illnesses specified in the policy.
In Singapore, most policies cover at least 30 forms of critical illnesses such as heart attack, stroke, cancer, coronary heart disease, kidney disease, major organ transplant and others (subject to specific terms in the policy document that define what constitute the critical illnesses that are being covered).
Such critical illness coverage can be offered as a standalone plan or it is often added to a life policy as a payable rider.
Disability Income Insurance
Such a policy is designed to pay the insured a regular income in the event of disability. From a financial perspective, the effects of total and permanent disability may be worse than death because not only will the person be unable to support the family, he/she will require financial support which might exacerbate the financial burden already imposed on the family.
Disability income insurance is different from total and permanent disability (TPD) benefit as the latter’s sum assured is normally equivalent to the death benefit and upon TPD occurring, the proceeds are either paid in a lump sum or in installments. TPD is commonly defined as being unable to perform any occupation or if the insured loses his/her hearing or sight or both feet or hands etc.
As for disability income insurance, the monthly benefits are subject to a maximum of 60-80% of the pre-disability income. And the commonly adopted definitions for disability income insurance are (1) if the insured cannot work at any occupation; (2) if the insured cannot work in any occupation for which he or she is or might be qualified for, in which event, factors like the insured’s training, education and experience will be taken into account; or (3) if the insured cannot work in his or her own occupation.
These are the common types of life and health insurance that provide useful and economical solutions to potential problems in the risk management process of personal financial planning.
There are also general insurance products that are related to assets and liability protection – such as motor, home, travel, professional indemnity insurance etc which I will touch upon subsequently
