Different types of insurance policy

Planning early for life coverage

Just why is life insurance so crucial and why is it important to start a policy as early as possible? QUAH CHIN CHIN lays out the basics

Buying a life insurance policy is a crucial step in financial planning. Such insurance is a long-term commitment that provides financial coverage to the policyholder or his beneficiary in the event of unforeseen circumstances such as critical illness, permanent disability or premature death.
It can also be used as a vehicle to achieve one's financial goals, including income protection, building a retirement fund or saving up for a child's education.
Life insurance policies fall into various classifications. A whole life policy is one in which the premium - money paid for the coverage - remains level for the entire duration of the policyholder's life.
It provides protection and increases cash value (also known as cash surrender value or surrender value), or the cash amount an insurance company will pay a policyholder when he cancels or surrenders his policy prematurely, or savings.
A term policy, meanwhile, provides protection only and is usually renewable annually, while an endowment policy involves an insured sum that is payable upon maturity of the policy (at the end of a fixed term of 20 years, for example) or on prior death of the policyholder.
There are also investment-linked policies, which, as the name suggests, are tied to investments. Policyholders with 'participating' policies are entitled to profits or losses of an insurance company through the distribution of bonuses, while those holding 'non-participating' policies will earn only the guaranteed cash value stated within his contract and not company dividends.

Needs and goals
Determining which policy to get depends on such factors as one's risk appetite, needs and financial goals, according to financial advisers BT spoke with.

For example, traditional whole life policies would appeal to a risk-averse person, while someone with a higher risk appetite could consider investment-linked policies, said Nick Czolak, Manulife (Singapore) senior vice-president and chief marketing officer. 'We'll show the prospective buyer the options available based on his profile, such as his attitude to risk, investment outlook, his considerations in terms of family, and circumstances,' he explained.

One's objectives also play a part, said Joan Lim, a financial planner at PromiseLand Independent, an advisory and insurance brokerage firm.

'We'll find out if they have any special objectives; for example, how much money they want to have in the bank if they wish to retire by 40, and make other suggestions for their consideration, such as disability income and extending their term plans,' she said. 'From there, we'll work backwards and come up with a financial roadmap for them.'

Insurance premiums depend on the amount of cover and type of plans. For instance, premium rates for non-participating policies are lower than those for participating policies.

Another important point new policyholders are often advised on is to consider carefully before terminating or surrendering their policy before the tenure is up, as doing so typically results in losses. Early cancellation may incur not only additional fees, but also causes the holder to lose his benefits.

'Your health status could have changed since you first took out the policy and you may not be able to get a similar level of protection in a new policy, as you'll be required to declare all pre-existing conditions and possibly undertake a medical examination,' according to advice from the Life Insurance Association (LIA) of Singapore's website.

For those unable to continue paying premiums on their current policy, the association suggests looking at other options available or reducing the sum insured, which would in turn lower the premiums.

Start young

Given that one is healthiest when young and that cash values build up over the years, it makes sense to start a policy from young.

'The whole idea of insurance is to start as young as possible,' said Patrick Lim, PromiseLand associate director, adding that this is the reason parents are encouraged to buy coverage for their newborns.

Added Ms Lim: 'When people start young, the premiums are at the lowest and they're at the peak of their health.'

Still, for those unsure of what to look out for when buying insurance for the first time, she suggests low premium, high-cover plans and hospitalisation plans to start off.

'Then as they progress in life, they would develop a clearer picture of what they want,' she said. 'This would be helpful for their financial planning; for example, more cover, returns or savings.'

And as their priorities shift or when they experience significant changes in their lives - such as getting a pay rise, tying the knot or receiving an inheritance - financial advisers would typically have periodic reviews with them.

These views were shared by Mr Czolak, who nevertheless sounded a note of caution: 'The younger you start, the cheaper it is and the more time you have, but of course, if you can't afford it, don't do it. Weigh your priorities.'

Indeed, being clear about one's goals and knowing what to expect are vital before jumping on the bandwagon. This is especially so in light of the current economic turmoil and the recent collapse of insurance giant American International Group, which had to be rescued with American tax dollars.

In the words of LIA: 'As the prospective customer, you still have to play an active role in determining your own financial needs; your financial adviser can help you make the right decisions but not make the decisions for you.'
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