Now that we have an idea of what types of policies are available, how do we decide on which type to buy? How much coverage should we get? How long a term should we cover? This section aims to give the reader the low-down on how insurance is sold, plus some sound advice on optimum buying strategies for the individual.
It’s all about the money
Personal Insurance is a highly competitive business, in which the sales force depends almost entirely on commissions. Certain types of policies will be more expensive in terms of the coverage received, mostly because of the commission structure.
Insurance companies pay larger commissions to agents for selling Endowment policies than for Whole Life and Term policies, since the larger savings element in Endowment policies allow the company to invest the extra money you put in and take some of the gains for themselves.
Personal Insurance is a highly competitive business, in which the sales force depends almost entirely on commissions. Certain types of policies will be more expensive in terms of the coverage received, mostly because of the commission structure.
Insurance companies pay larger commissions to agents for selling Endowment policies than for Whole Life and Term policies, since the larger savings element in Endowment policies allow the company to invest the extra money you put in and take some of the gains for themselves.
How much coverage do I need?
There is no one answer to how much coverage is enough. Some financial planners advocate a sum assured of between 5 to 7 times your annual salary for a life assurance plus a suitable amount for health insurance, but this may not be suitable for everyone as needs vary from one individual to another.
What is important is to remember the sole purpose of insurance – to replace your income in case you die, become unable to earn a living, or fall ill, so that your dependents can maintain their current lifestyle.
To calculate how much life assurance coverage you require, consider all your income and expenses.
For expenses, the factors to consider are:
· How many dependents do you have? This includes your spouse, children still living with you, aged parents and extended family, if applicable.
· What are the monthly expenses incurred by these dependents? This should include living expenses, childcare, and education.
· Do you have any outstanding debts? A provision must be made for paying off your housing loan, car loan, credit card debt, and any bank overdraft.
· Do you contribute to an education fund for your children, or other forced-savings products?
· How much do you estimate your uninsured medical costs to be? Don’t forget the possibility of critical illnesses that require expensive long-term treatment such as kidney failure or cancer.
· How much do you expect your funeral to cost?
· Don’t forget to factor up all the above costs by an average of about 4% p.a. for inflation. At this rate, the price of almost everything will double every 18 years.
For income, the factors to consider are:
· What fixed assets do you currently own?
· How much do you have in savings and investments? What is the rate of return you expect?
· Does your spouse earn an income?
· Don’t forget to account for any capital gains tax, and income tax on the sale of your assets or on your investment income.
It’s worth noting that many people who buy life assurance are under-insured. Because of the savings and investment component of popular Endowment and Whole Life policies, premiums are much higher than for Term policies. To make up for this, many people simply buy less coverage, which defeats the purpose of buying insurance in the first place – to ensure that dependents can maintain their current lifestyle should the worst happen.
There is no one answer to how much coverage is enough. Some financial planners advocate a sum assured of between 5 to 7 times your annual salary for a life assurance plus a suitable amount for health insurance, but this may not be suitable for everyone as needs vary from one individual to another.
What is important is to remember the sole purpose of insurance – to replace your income in case you die, become unable to earn a living, or fall ill, so that your dependents can maintain their current lifestyle.
To calculate how much life assurance coverage you require, consider all your income and expenses.
For expenses, the factors to consider are:
· How many dependents do you have? This includes your spouse, children still living with you, aged parents and extended family, if applicable.
· What are the monthly expenses incurred by these dependents? This should include living expenses, childcare, and education.
· Do you have any outstanding debts? A provision must be made for paying off your housing loan, car loan, credit card debt, and any bank overdraft.
· Do you contribute to an education fund for your children, or other forced-savings products?
· How much do you estimate your uninsured medical costs to be? Don’t forget the possibility of critical illnesses that require expensive long-term treatment such as kidney failure or cancer.
· How much do you expect your funeral to cost?
· Don’t forget to factor up all the above costs by an average of about 4% p.a. for inflation. At this rate, the price of almost everything will double every 18 years.
For income, the factors to consider are:
· What fixed assets do you currently own?
· How much do you have in savings and investments? What is the rate of return you expect?
· Does your spouse earn an income?
· Don’t forget to account for any capital gains tax, and income tax on the sale of your assets or on your investment income.
It’s worth noting that many people who buy life assurance are under-insured. Because of the savings and investment component of popular Endowment and Whole Life policies, premiums are much higher than for Term policies. To make up for this, many people simply buy less coverage, which defeats the purpose of buying insurance in the first place – to ensure that dependents can maintain their current lifestyle should the worst happen.
How long a term?
The term really only applies to Term Assurance policies. Most people don’t need life insurance coverage throughout their life. The secret to buying a policy with the right term is to figure out how long you need to be insured.
Start by estimating when your children will be out on their own and no longer need your financial support. Then look at when you expect to pay off all your loans. Finally, consider your expected retirement age or when your retirement benefit such as state pension or EPF becomes available. All these factors should give you a rough idea of how long you need coverage for.
The term really only applies to Term Assurance policies. Most people don’t need life insurance coverage throughout their life. The secret to buying a policy with the right term is to figure out how long you need to be insured.
Start by estimating when your children will be out on their own and no longer need your financial support. Then look at when you expect to pay off all your loans. Finally, consider your expected retirement age or when your retirement benefit such as state pension or EPF becomes available. All these factors should give you a rough idea of how long you need coverage for.
It’s a matter of health, too
Insurance may be difficult and expensive to obtain if you are not in good health. If you have a heart condition, or are grossly overweight, you may be declined insurance or be charged an extra premium. One company may charge more than another, depending on how it estimates the risk of your condition (this risk assessment process is called underwriting).
So there’s a good case to be made for getting a life policy early in life while you are still in good health. However, it doesn’t make much sense to buy one until you have dependents or debts.
Insurance may be difficult and expensive to obtain if you are not in good health. If you have a heart condition, or are grossly overweight, you may be declined insurance or be charged an extra premium. One company may charge more than another, depending on how it estimates the risk of your condition (this risk assessment process is called underwriting).
So there’s a good case to be made for getting a life policy early in life while you are still in good health. However, it doesn’t make much sense to buy one until you have dependents or debts.
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