Insurance - Things to Watch Out for

Assessment of Your Needs

Buying a life insurance policy is a long term commitment. Take some time to assess what you need and what you can afford. Shop around and compare the different products available before picking the policy you find most suitable.

Here are two checklists to help you assess your insurance and your investment needs.

Work through this checklist to assess your insurance protection needs: 

• What is the risk you are insuring against? It could be death, a critical illness, or total and permanent disability.
• How much you want to provide for yourself and / or your dependants to cope with financial loss if the event happens, depends on factors such as:
  • The number of dependants you have;
  • Debts and other obligations that you need to pay off
  • The standard of living you want for your family
  • How much you need for your children's education;
  • The age range of your dependants - when your youngest child is likely to start working and earn an income
  • Whether you already have some savings and investments to rely on.  

You may wish to refer to the Insurance Estimator on the CPF website.

• How much can you afford? How much you pay in premiums depends on the insurance coverage you want. If you have budget constraints, start with some minimum coverage like term insurance first, e.g. enough to meet basic living expenses until your youngest child can earn an income. While you may want to maintain your dependants’ current lifestyle, you need not aim to provide this if you find the premiums expensive. Remember, you will have other expenses and financial commitments and if you are unable to keep up with paying the premiums, your insurance policy may lapse or be terminated.

If you want to buy an insurance product for investment reasons too,work through this checklist to assess your savings and investments needs and how the insurance product fits in:

• What are your financial goals? They could be specific like paying for your children’s education or saving for your retirement. These goals have specific time frames or investment horizon(s).
• Work out how much you need for your goals and when you need the money. Based on what you have today, you may need $30,000 more in 5 years’ time for your daughter’s education or an additional $200,000 in 15 years for your retirement. Knowing how much you need and how much capital you have to start with will help you determine the sort of returns you want, subject to the risk you can afford to take and how well you understand the product to be suitable for you.
• How will the product you are considering help you achieve your financial goals? How does the product fit into your existing portfolio of investments? Are you sufficiently diversified? Do compare the investment features and risks of the insurance product with other types of financial products (e.g. shares, bonds, deposits, unit trusts, or exchange traded funds).
• Make sure you understand the factors that affect the product’s returns. Do the returns justify the risk you will be exposed to? Higher returns come with higher risks and in extreme cases, you may lose all the capital you invest in a product.
• Choose a product that fits your risk profile, i.e. how much loss you are willing to and able to bear in exchange for the potential returns of the investment. Some insurance products have cash values which fluctuate. For others, the risk may be that returns underperform your expectations. Do not over-state your ability to take risk in the hope of a higher expected return.
• How active an investor do you plan to be? Even if you are a passive investor and take a long-term buy and hold approach, you should still monitor your insurance products regularly. You may need to take action if your investments appear unlikely to achieve the amounts you need for your financial goals.

Read more on investing and selecting investment products.  

Tip: Take time to think through your needs and personal circumstances, and also the product that is recommended to you. You must not feel obligated to sign up right away or even with the financial adviser representative you are talking to if you are unsure or uncomfortable with the recommendation/advice. You can always engage another financial adviser representative.

Should you buy a bundled insurance and investment product?

Life insurance products like whole life and endowment participating policies and ILPs provide both protection coverage and investment benefits. Such bundled products tend to build up cash values which are paid out either when the policy matures or is surrendered. Death benefits, including the cash values, are paid out upon the death of the insured.

Insurance-only products such as term insurance do not build up cash values. For the same level of insurance cover, the premium for a term insurance product will be lower than the premium for a bundled product.

If you have both insurance and investment objectives, there are two options for you to consider: 

	Advantage	Disadvantage
Option 1 Buy a separate product each for insurance coverage and for investment returns, e.g. you could consider buying term insurance and investment products like bonds, shares and unit trusts, depending on what suits you.	Products are unbundled so you know how much of your money is going into insurance coverage and how much is going into investments. You can make changes to your investments without affecting the insurance policy and vice-versa.	You need to be pro-active about identifying and building a portfolio of investment products to suit your financial goals, risk profile and personal circumstances. You also need to actively monitor your portfolio’s performance and make adjustments where necessary.
Option 2 Buy a product which bundles the two objectives, e.g. you could consider whole life or endowment plans or ILPs.	If premiums are paid on a regular basis, you may find this attractive as it instils discipline for regular savings.	Products are bundled so unless it is an ILP, you won’t know how your premiums are allocated between insurance and investment. If you are unhappy about the returns you are getting and want to terminate the policy prematurely, you might also find the accumulated cash values disappointing.

If you are considering a bundled product, do compare its projected returns and risks with other investment products. Ask your financial adviser representative to help you make this comparison.

Read more on the different life insurance products.

What must you do when buying insurance?

Disclose all required information

You must truthfully disclose all the information asked for in the proposal form (application form). If you are not sure about including some particular information, it is recommended that you disclose it anyway. This includes any information you may have given to your financial adviser representative but was not included in the proposal form.

Make sure that the form is properly completed. If you spot any inaccuracies or missing information, ask for the document to be amended immediately. Do not sign the application form if there is inaccurate or missing information as the policy could be voided by the insurance company and you or your dependants could end up without protection when it’s most needed.

Make sure you understand the policy

Make sure that the recommended policy suits your needs. Do take time to read the documentation carefully and ask questions when in doubt. Take the document home to read if you need more time. Ask your financial adviser representative to explain all calculations in writing and for all verbal explanations and promises about returns and benefits to be confirmed in writing before committing to buy a product. If you realise that the policy is not what you wanted or not what was promised to you or if some of your personal details are inaccurate, you must contact your insurance company within 14 days (from the date of receiving the contract) to clarify or cancel your policy.

Do find out if the policy has any exclusions on coverage. In addition, find out about the claims process:

• how to make a claim
• how the assessment is made
• how long it will take

Be cautious

Never sign blank or incomplete forms. Do not release your identity card to someone you do not know or without first clarifying why it is needed. Be careful of verbal promises and guarantees of high returns and insist on written confirmation before committing to buy a product.

How much will you be paying?The premium you pay for your insurance policy depends on the insurance coverage and / or the savings or investment benefits you want, if any. Take time to think about what you can afford when deciding on the type of insurance policy and the amount of coverage to buy.

On-going responsibility as a policy-holderAlways check the statements and read the letters sent to you by your insurance company. If there is anything that you do not understand, ask your financial adviser representative or the insurance company for an explanation immediately. 

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