Understanding Life Insurance · Categories of Insurance Life Insurance Health Insurance General...

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© The MoneySENSE-Singapore Polytechnic Institute For Financial Literacy

Understanding

Life Insurance

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Understanding Money Understanding Yourself, Your Rights

and Responsibilities

Managing Money to Live Within

Your Means Planning Ahead

Selecting Financial Products

DEVELOP YOUR CORE FINANCIAL CAPABILITIES

START YOUR FINANCIAL PLANNING

Step 1: Identify your short-term and long-term

needs / goals

Step 2: Know what income or savings you have

to meet these needs / goals

Step 3: Manage your income or savings to help

you manage your daily expenses, as well

as to reach your goals

MEET YOUR FINANCIAL GOALS Manage your cash flow

Buy a home within

your means

Provide for your life insurance and

healthcare needs

Have sufficient

income for life

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Content

Objectives of This Workshop ..................................................................................................... 4

Understanding Life Insurance .................................................................................................... 5

Categories of Insurance ............................................................................................................. 6

Review Your Insurance Needs ................................................................................................... 6

Understanding Life Insurance Products ..................................................................................... 7

Interpreting Your Insurance Documents ................................................................................. 10

How to Select a Suitable Product? ........................................................................................... 11

Activity: Which is a Suitable Product? ..................................................................................... 12

What is Direct Purchase Insurance (DPI)? ............................................................................... 12

How can I Purchase DPI?.......................................................................................................... 13

Using compareFIRST ................................................................................................................ 13

Case Study 1 ............................................................................................................................. 14

Case Study 2 ............................................................................................................................. 15

Considerations When Meeting Your Financial Adviser ........................................................... 15

Appendix A: Know Your Rights ................................................................................................ 17

Appendix B: Questions you can ask your Financial Adviser .................................................... 18

Your Personal Notes................................................................................................................. 20

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Objectives of This Workshop

This workshop aims to help you evaluate information. It will not involve any advice in product selection. Any mention of industry, company or reference to product is solely for the purpose of illustration and application of concepts. You should consult a licensed financial advisor before making a decision to invest in any products.

Reviewing your insurance

needs

Understanding Life Insurance

Products

How to Select a suitable product?

What is DPI?

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Understanding Life Insurance

What Is Insurance? Insurance is paying a small amount (premium) to an insurer to protect you against large-scale financial loss due to an unfortunate event.

Risks That Can Cause A Financial Loss

Assessing Your Protection Needs

How much do you want to provide for

yourself and/or your family if any of the

above events occur?

Disability

Critical Illnesses

Total and Permanent Disability

Hospital & Surgical

Death

Number of

Dependants Debts and Other

Obligations

Age Range of Dependants

Desired Lifestyle

Children’s

Education

Any Existing Savings/Investments

?

Budget

Constraints

Factors that can affect your decision in the type of

insurance and amount you need

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Categories of Insurance

Life Insurance Health Insurance General Insurance For Financial Protection Needs: A policy that pays out an agreed amount known as the sum assured under certain circumstances such as death or total permanent disability For Retirement Planning, Savings, Investments: Life insurance policies are often marketed to meet retirement planning, savings and investment purposes too. For example, an annuity can provide an income during your retirement years.

An accident, illness or disability may leave you with some financial loss. This policy helps you and your family cope with expenses during these times.

A policy that gives you some financial coverage against a range of events or losses which could be suffered, e.g. loss of your belongings, or damage to your car or house. If the event happens, your insurance company will pay you an agreed amount, or an amount to cover some or all of the loss.

In this workshop, we will focus on life insurance (unbundled and bundled) only.

Unbundled and Bundled Products Unbundled products are life insurances that provide only protection, e.g. term insurance. That is, they pay out the agreed sum assured to cover financial loss in an insured event. Life insurance products, e.g. whole life and endowment participating policies or investment linked plans (ILPs), that bundle a savings and investment element together with insurance protection are known as bundled products. Bundled products tend to build up cash value over time, which are paid out when the policy matures or is surrendered. Hence, they tend to be more expensive and carry investment risk.

Review Your Insurance Needs 1. Use the Insurance Estimator

https://www.cpf.gov.sg/eSvc/Web/Schemes/InsuranceEstimator/InsuranceEstimator to help you estimate the amount of insurance you need.

This is the amount of money your dependants would need, should you die immediately. List all liabilities (debt owed) and post-mortem expenses. You should take into account inflation when estimating the required amount as inflation can lower the purchasing power of the insurance proceeds.

https://www.cpf.gov.sg/eSvc/Web/Schemes/InsuranceEstimator/InsuranceEstimator

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2. Work out the budget for the insurance premium

How much can you afford? If you have budget constraints, start with some minimum coverage like term insurance first to meet basic living expenses. While you may want to maintain your dependants’ current lifestyle, you should not aim to provide this if you find the premiums expensive. Remember that you have other expenses, bills and financial commitments. If you are unable to keep up with paying the premiums, your insurance policy may lapse or be terminated.

3. Research and select the product that best meet your needs

You can do so using unbundled products, bundled products, or simply buying term and investing the rest in investment products such as shares and unit trust. Do take note of the investment risk inherent in all these products and take your risk profile into consideration.

4. Review your policies regularly especially if your personal circumstances has

changed.

Understanding Life Insurance Products Essentially, there are 4 types of life insurance policies.

Term

Whole Life

Endowment

Investment-Linked

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Comparing Life Insurance Products

When Considering Term Insurance: Choose the term you want carefully. If you choose too short a period, your dependants will have no coverage to benefit from after the term expires. If you want to buy another term insurance policy after the first one has expired, you will be subject to medical examination. The premiums will also cost more due to increased age, so it is increasingly costly to purchase term insurance policies over time. Consider buying a term insurance product for a longer period of coverage when you are younger. Do pay premiums on time. If the policy lapses, a reinstatement of policy will require you to prove that you are still healthy.

When Considering Whole Life Insurance: Given that buying a life insurance policy is a long term commitment, consider the amount of premium you are able to commit as early termination may result in losses. Also, while you may want to provide for your children until they start work, you may not want to provide for them throughout your whole life

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When Considering Endowment Insurance: Beware – they are sometimes marketed as savings plans though they are not like deposits as you may not get back what you put in. A part of your payments will pay for insurance cover. Hence you may wish to think twice before buying endowment plans to build savings if you don’t need the insurance it provides. Compare the features, returns and risks of the product against those in the market. Buy one that can meet your needs and that you are able to sustain payment in the long term, as terminating the plan before the maturity date will result in losses.

When Considering Investment-Linked Insurance: There are risks as you get older. Insurance coverage charges usually increase as you grow older. Even if you are paying the same monthly premium, more units may be deducted to pay the higher insurance coverage charges, thus leaving fewer units for investment. If you have a combination of high insurance coverage and a poorly performing investment-linked sub-fund, the value of the units in your policy may not be adequate to pay the insurance coverage charges. In such a scenario, you will have to increase your premium payment or reduce the insurance coverage. Some ILPs are Specified Investment Products (SIPs). Consumers should be aware that some ILPs can have features that are more difficult to understand. Understand the key risks and features of such products before investing in them. Financial institutions such as financial adviser firms must assess whether you have the relevant knowledge or experience to understand the risks and features of SIPs before selling them to you. This process is known as the Customer Knowledge Assessment (CKA). The financial institution will inform you if you are assessed as not possessing the relevant knowledge or experience. If you still intend to proceed with the transaction, the financial institution must offer advice to you. Only financial institutions which are authorised to provide advice may do so. Certain safeguards will also apply.

http://www.moneysense.gov.sg/Understanding-Financial-Products/Investments/Guides-and-Articles/Investing-in-Specified-Investment-Products.aspx

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Interpreting Your Insurance Documents Your insurance contract is an important legal document. Most information can be found in the first few pages of your insurance contract; such as 1. Plan Name

This states the name of the product. In some cases, the name of the plan will somehow indicate the type of product by having the word ‘whole life’ or ‘endowment’ as part of its name. For endowment plan, the name will usually suggest the duration such as having 18, 21 or 24 stated as part of the name.

2. Entry Date, Policy Date They mean the same, which is the date the plan commences.

3. Term and Maturity Date Some insurance companies will state the maturity date which is the end date of the policy. For others, they may use ‘Term’ or ‘Duration’ to state the number of years the policy will run.

4. Sum Assured

The amount that one is insured for which is the guaranteed and paid out when an insured event such as death or total permanent disability occurs. Some insurance companies may use other terms such as Face Amount, Principal Sum or Sum Insured.

5. Benefits

This section will state the type(s) of benefits the policy carries, when and how the sum assured or cash value will be paid out. Do note that a portion of the total projected cash values are not guaranteed. It will also state if there are other additional benefits, provisions, supplements or riders attached to the policy and where you can find them in the contract.

You can cross check at the sub-section for the detailed description of these add-ons. The contract would often state, though may not be on the first few pages, a breakdown of premium for the list of benefits.

6. Premium

The amount of premium you need to pay, how often (monthly, quarterly, half-yearly, or yearly) and for how long. You can change your mode of premium payment by informing the insurer.

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How to Select a Suitable Product?

Checklist

1. What is the purpose of this policy?

2. Do I need investment returns?

3. Do I need help to manage my investment?

4. What is my budget for premium? 5. Can I afford it in the long term if personal situation changes?

Some products are deemed to be more suitable than the other for a specific financial goal. Your choice will depend very much depend on your budget, personal circumstances and risk profile. Term plans will be excellent to meet protection need if budget is limited but having high coverage is a priority. Whole life insurance will be much more expensive given the same level of protection. Before you buy, do consider how long you wish to continue providing for your dependants. If your children are young, it may be for a long period of time but it may not be for your whole life. Be mindful that using ILPs to meet protection need can be very costly in the long term as protection charge increases with age. There is also the risk that the investment underperforms expectations. Ask about the details of the features as ILP tend to be more complex than term and whole life. ILP offers the flexibility of ad hoc or regular cash withdrawal. However such features may attract charges as well and the policy will lapse if the fund values cannot cover the fees and charges. Endowment has specific maturity period and will provide cash to match one’s desired goal such as education or retirement. Endowments are the most common product used to save for tertiary education. But they are not like deposits and buyers take the risk that their endowment plans may underperform investment expectations. Whole life is suitable as a protection plan if you would also like to enjoy some cash value to meet other financial goals. If you are buying whole life insurance to build up savings, it may be less suitable for you if you are no longer young or nearing retirement. Some products are unique to meet a specific need while some may be more complex. You should be familiar with the objectives served by each type of insurance in order to match them with your needs.

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Activity: Which is a Suitable Product?

If your concern is ... You may want to consider this type of insurance ...

Premature death or Total & permanent disability

Opt for ________________ if protection is your only concern. Choose Bundled products only if you wish to meet both protection and investment objectives. Alternatively, you can also buy term insurance for your protection needs and buy investments separately.

Protection when family is still young and some cash when I retire

______________ insurance or buy term and invest the premium difference if I can manage my own investment

Assurance of cash at specific time

Endowment products with specific ________________ and option of regular cash payout ILP that is designed with low protection

Useful Tip It is helpful to have an insurance summary portfolio. This will provide you with an overview of your coverage, maturity date and your cash values. Review your insurance portfolio regularly (every 2 – 3 years) or when your personal circumstances has changed, e.g. getting married, your spouse has stopped working, etc. It is also important to update your insurer when there are changes in your personal data, e.g. change of address, name, occupation etc.

What is Direct Purchase Insurance (DPI)?

If you know how much insurance to buy, the type of insurance you want, and do not require financial advice, you may wish to consider Direct Purchase Insurance (DPI). Direct Purchase Insurance (DPI) are simple life insurance products. As they are sold without commissions and financial advice, no commission is charged and you pay lower premiums than comparable life insurance products.

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DPI It consists of a class of simple term and whole life insurance products with total and permanent disability (TPD) cover and optional critical illness (CI) rider that you can buy directly from life insurance companies. DPI have broadly standardised features which makes it easier to compare products when deciding which DPI to purchase.

But do note that while DPI have broadly standardised benefits and features, not all benefits and features of DPI are the same across life insurance companies.

How can I Purchase DPI?

1. Review your needs

Do your homework by understanding your own insurance needs. Use the

budget and insurance coverage calculators to determine if you can afford the

insurance policy and how much coverage you need.

2. Compare

Choose three to four products and compare their features and benefits.

compareFIRST.sg is a useful web aggregator that you help you compare

products among different insurers. Read the DPI fact sheet and checklist.

3. Understand the product you wish to purchase

Select the product that best meets your needs. Purchase the product directly

from the customer service centres or from the websites (if available) of the

applicable insurer.

Using compareFIRST What is available for comparison? DPI (Term and Whole Life products only) and Non-DPI (Term, whole life and endowment). What can we compare? Consumers can compare the premium, features, benefits, cash values and distribution cost of various products offered by different insurance providers. Web portal: www.compareFIRST.sg

http://www.moneysense.gov.sg/Financial-Planning/Financial-Calculators/Budget-Calculator.aspx

https://www.cpf.gov.sg/cpf_trans/ssl/financial_model/insurance_estimator/ie1.asp

http://www.comparefirst.sg/

http://www.moneysense.gov.sg/~/media/Moneysense/Understanding%20Financial%20Products/Insurance/DPI%20Fact%20Sheet%20and%20Checklist.pdf

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Case Study 1 Mr Lee wants to save for his new-born son’s tertiary education. He is risk adverse and is considering an endowment plan. The current average cost of a 4-year local undergraduate program is $32,000. If tuition fee increase at 5% per year, the estimated cost is $85,000 in future value. His budget is $5,000 per year. Mr Lee check out the products on compareFIRST and shortlisted 4 products. How should he compare and decide the product that best suit his needs? Which plan should Mr Lee purchase and why? Tip: Be S.M.A.R.T

Useful information and calculators are available to help you

understand life products, your needs and common jargons

used in insurance.

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Case Study 2

Mr Tan age 40 is married with 2 boys, age 5 and 7. Mr Tan’s parents are retired and self-sufficient but he is worried he may need to support them if their savings run out. He hopes his spouse can stay home to look after the children should unfortunate events happen to him. He recently reviewed his insurance and reckon he will need another $500,000 protection again premature death, TPD or critical illness. His budget is $300 per month. Help Mr Tan check out the products on compareFIRST and shortlist 3 insurance products that best meet his needs. Explain why the selections are suitable.

Considerations When Meeting Your Financial Adviser

The financial adviser representative you deal with must tell you which firm he represents, the products and services authorised to sell, and how he is paid. If he is a representative of a life insurance company, he can only advise you on that company’s products and products of other financial institutions if the life insurance company he represents has agreed to distribute those products. Representatives from “Independent Financial Adviser” (IFA) firms can provide you advice on the products of at least four life insurance companies. He must clearly show you that he does not have financial or commercial links with these insurance companies that could influence his recommendations to you.

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Do choose your financial adviser representative carefully. You must be comfortable with him/her as you will be revealing personal financial information about yourself, in order for him/her to provide you with a suitable recommendation. If you are uncomfortable with the recommendation or want to know what else is available, do ask your financial adviser representative. Or you can change your financial adviser representative. Do shop around to see what other insurers are offering and compare the different policies.

Key Takeaways

1. Be clear of your objective when buying a policy and workout how much protection

you need.

2. Check your budget to make sure you can afford the premium in the long term. Prioritise your needs if your budget cannot meet all the objectives.

3. Understand the features of the product and how they can meet your needs.

Always ask your financial adviser when in doubt.

Useful Websites: MoneySENSE: www.moneysense.gov.sg compareFIRST: www.comparefirst.sg The MoneySENSE-Singapore Polytechnic Institute for Financial Literacy: www.finlit.sg

http://www.moneysense.gov.sg/

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Appendix A: Know Your Rights 1. Documents at Point-of-Sale.

You should receive three documents from your representative:

Your Guide to Life Insurance and/or Your Guide to Health Insurance

Product Summary (describes the features of the particular product)

Benefit Illustration (for Life insurance only) 2. Free-Look Period.

You have 14 days to review your policy. If you decide that the policy is not suitable for your needs, you can send them a written notice and the company will refund all your premiums less medical and other expenses you have had to pay. If your policy is an investment-linked policy, the amount returned to you will also reflect any change in the market value of the funds in your policy.

3. Reports

If you have an investment-linked policy, you will receive a statement on the units you hold in your policy at least once a year. You can also expect to receive a fund performance report at least every year. If you have a participating policy (whole life or endowment), you will receive a yearly statement on any annual bonus or dividend from your insurance company

4. Period of Grace

The insurance company will give you extra time (usually 30 days) after the premium due date, to pay your premium to renew your policy. During this period, the policy continues to be in force and you are expected to pay the premium

5. Premium Payment

You can pay your premium in cash, cheque or through GIRO deduction. Most companies also accept payment through credit cards or at automated machines (AXS, SAM). If you are paying cash to your representative, insist on a company receipt to be issued to you. If you are paying by cheque, issue only to the company and NEVER to your representative and write your name and policy number at the back of the cheque. When in doubt, always call up the company customer service centre to verify.

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Appendix B: Questions you can ask your Financial Adviser

Insurance Protection

What kind of insurance policy do you recommend and why?

What will my insurance policy cover? What kind of benefits and limitations does it have? Will it meet all my insurance protection needs? What exclusions are there? If I already have some life insurance coverage, how does the recommended policy help me? Will I be over-insured?

What if I want to change the amount of coverage as my needs change? What kind of flexibility do I have? How much will it cost now or in the future?

Investment Plans

How will the recommended product meet my investment objectives? What are the returns and risks like? Can I lose some or all of my money in this plan? Why is the product suitable for my risk profile?

What does it mean if some of my returns are guaranteed and some non-guaranteed? What are the risks for my non-guaranteed returns?

If I am buying an ILP, tell me what funds are available? What are their investment objectives, risks, performance track record and their charges? How do I select a fund based on my risk profile? Will I lose some or all of my money?

How does the product you recommend fit in with my other investments? Will it add more risk to the portfolio of products I now have?

What other investment products will suit me? Health Insurance

What does the health insurance policy cover and what it doesn’t cover?

Can the insurance company change the premium in the future from those shown to me when I buy the policy?

When or in what circumstances will my health insurance policy end?

How do I make a claim? How will my future premiums be affected after I have made a claim?

Will I be covered for medical treatment performed outside Singapore? Premiums and Commissions

How much premiums will I be paying? How long do I need to pay the premiums for? Are there any riders which allow me to stop paying premiums for my policy if I become disabled and still benefit from the policy?

What happens if my financial needs or personal circumstances change e.g. I am retrenched or retire early? What if I can’t keep up with premium

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payments? What options do I have? Can I stop paying my premiums temporarily? What happens to my insurance coverage if I stop paying my premiums?

How much are you being paid for selling this policy? What if I buy other types of policies?

Withdrawals and Termination

Can I make partial withdrawals of cash values?

What happens if I make an early withdrawal or terminate early? What will it cost?

For more details, refer to: http://www.moneysense.gov.sg/en/Understanding-Financial-Products/Insurance/Who-are-You-Dealing-With.aspx.

http://www.moneysense.gov.sg/en/Understanding-Financial-Products/Insurance/Who-are-You-Dealing-With.aspx

http://www.moneysense.gov.sg/en/Understanding-Financial-Products/Insurance/Who-are-You-Dealing-With.aspx

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Your Personal Notes

Understanding Life Insurance · Categories of Insurance Life Insurance Health Insurance General...

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