If you’re new to the ‘World of Insurances’, you may not know what insurances to purchase. Some may buy it because the agent’s is their friends or relatives. It could also because they want to help the agent’s meeting his/her production target rather than fulfilling their insurance needs. Whatever the reasons are, it end up that their first insurance plan may be differs from their actual needs.
Most established insurance firms carry out needs analysis session of their potential clients first before recommending any relevant products. The analysis is to understand the potential client’s ASPIRATION, CONCERN and FINANCIAL STATUS before an appropriate proposal can be drafted to meet those needs. Only after the relevant info has been collected, can an insurance consultant work towards addressing the client’s needs.
Being a customer or a client of an insurance firm or broker, you also need to prioritise your needs in planning towards your financial goal. To help you understand what you are looking for in buying insurances, here are some insights that may be useful to you.
First, ask yourself this question: What is the purpose of having insurance? Is it meant for the protection of income for your loved ones? Or to cover your medical expenses due to illness or accidents? Or for your retirement needs? Or to have sufficient funds to send your children for their varsity studies? If you have limited cash to spare on this, start with one or maximum two needs first.
Next, you need to ascertain your affordability. Most insurance plan is meant for a long term commitment. Make sure to keep the plan in force for as long as possible. Early or pre-mature termination of plan may result in loss of benefits or lower return (if any). Some plans have a flexible premium paying term, for example, a plan is still in force after a certain years of premium paying term of 15 or 20 years.
So, what is the best plan for most people? There is no fixed answer to that as every individual needs is unique. Generally, insurance plans are categorized in the following manner:
a) Term Plan – This is the most basic plan for everyone. You can have a higher coverage at the lowest possible premium. Of course, the premium depends on your age at inception of the policy and your medical status. Generally, such plans only provide coverage against death (regardless of the cause) and total and permanent disability. (The definition of total and permanent disability varies from firm to firm.) This plan is also known as ‘pure’ insurance – it only pays based upon the Principle of Indemnity (paid only if there is loss). As the name applies, “Term Plan” has its expiry date, for example, 10, 15, 20, 25 or 30 years from the date of inception or it is tag to the insured age till 60, 65 or 70 years old. If the insured terminates the policy earlier, the premium payment will stop, and so does the coverage.
b) Whole Life Plan – Most working adults would like to have this plan. If you plan to own one, start this plan at a younger age as the premium is much lower. The premium to this plan will be fixed throughout your lifetime (except for addition of riders). It gives you the basic protection against death and total and permanent disability. Whole Life Plan is usually a ‘participating policy’ which means the amount of protection will grow (increase) over the years as the insurance company ‘invest’ part of the premium and give it back to the policyholders through dividends or an added coverage. The amount of dividend paid will fluctuate with the insurance company’s investment performance. Although this plan has a ‘Cash Value’ – which is the amount to be paid out in cash upon its termination, early termination may result in losses and therefore not recommended. As a ‘Rule of Thumb’, policies in force for more than 20 years will have cash value higher than the premium paid. Some of this plan also come with limited payment term whereby the insured only need to pay a certain period, say 15 or 20 years but yet having a lifetime coverage.
c) Saving or Endowment Plan – As the name implies, this plan is more for those who want to save for certain purposes such as wedding, buying a house, further studies, etc. One thing to note is for the plan ‘to grow’, it requires time. Therefore, this plan works well if your purpose is building fund for your child’s education, planning your own retirement or anything whereby you need cash 18-25 years down the road. Short term planning may not be feasible. This is also a participating policy and has cash value. Once the plan has reached its maturity, the whole policy will pay out and your coverage ceased. You cannot extend the period any further. Therefore, you need to plan properly before taking such policy.
d) Investment Plan – Insurance companies also promote investment plan for its policyholders. If you’re competent investor in stock market yourself or other form of investment, I is best you avoid such plan and invest on your own. This is because investment plan has more charges – insurance charges and investment charges. Investment charges include bid-offer spread, annual fund fee, top-up fee (if any) and other distribution charges. The insurance charge is deducted from the units that you bought and is calculated on monthly basis. Furthermore, you will be subjected to the fluctuating unit prices. The only difference is that should there be a claim on death or total permanent disability, the amount paid up will be the sum of insurance coverage and the value of your underlying units.
e) Riders – These are additional protection benefits that you may seek with an additional premium. Among the riders available are ‘Critical Illness’ riders, ‘Accident’ riders, ‘Hospitalization’ riders, ‘Waiver of Premium’ riders and many more. Usually, when claim made on this riders, the main (basic) plan will not be affected as the riders work on the principle of indemnity.