Coming of age 101: Getting started with buying insurance policies

SINGAPORE — I’ll be the first to admit that I’m pretty clueless about insurance. I’ve heard the words ‘products’, ‘premiums’, ‘coverage’ and ‘claims’ thrown around, but haven’t been able to make much sense of them yet.

After starting my first full-time job last year, my parents encouraged me to get my first insurance policy.

“I’ll just get what she gets,” I told the financial planner who had helped my sister a few months earlier.

Based on conversations with friends, I know this is common: many of us simply buy the same policies that friends or family have. Or when our friends become insurance agents, we buy the plans they offer us without doing much research ourselves.

A friend said: “To be honest, I still don’t know anything about insurance until now. I just close (my) eyes and pay $7,000 every year.

This past week I decided to talk to some financial advisors to get help on how to properly start an insurance portfolio, and they said that this blind trust method is definitely not the way to go.

HOW TO START

Mr Tan Chin Yu, client advisor at wealth advisory firm Providend, said: “You shouldn’t just blindly buy insurance because you might pay too much but still be underinsured for what you really need.”

Executive financial advisor Damian Pang said before you buy anything, it’s helpful to speak to a financial advisor to help you with your planning process.

In addition to providing professional financial advice and recommending suitable products, they can also share their own experiences and identify potential blind spots, he added.

“A good analogy is something like trying to assemble a personal computer yourself for the first time by purchasing different hardware parts from different sources. It can be a time-consuming and frustrating process,” said Pang.

Mr Tan Siak Lim, director of financial advisory group Financial Alliance, said it is important to make comparisons between similar products from different insurance companies.

“The difference between comparable products from different insurance companies can be significant. Also, talk to some financial advisors to find someone who can give you really good advice, as some may focus on selling products.”

WHY IS HEALTH INSURANCE A PRIORITY?

Since most of us don’t earn much at the start of our working lives, health insurance should be our first priority, the advisors say.

Medical costs can potentially be a huge financial burden, and locking in lower premiums at a younger age is a good reason to get health insurance early.

The insurance premium is the amount you pay for insurance. In general, the younger you are when you purchase health insurance, the lower your premium will be.

Financial Alliance’s Mr Tan said: “It is important to secure your protection, especially if you are still in good health and fully insurable.”

Once the disease strikes, getting health insurance becomes more difficult due to a pre-existing condition and some insurers may even turn you down as a customer.

If someone has limited financial resources and no insurance plans at all, it is always good to start with a hospitalization plan first, such as an Integrated Shield Plan from private insurers, Mr. Pang said.

“You may also choose to add a relatively inexpensive but useful accident plan for smaller, more common accident-related outpatient bills such as sprains, cuts, fractures, falls, burns and the like,” he added.

Similarly, Mr Tan from Providend would advise a young person to first consider whether they need an Integrated Shield Plan to complement their existing MediShield Life.

MediShield Life is a basic health insurance policy that every Singaporean has. Managed by the Central Provident Fund (CPF) Board, it helps pay major hospital bills and some expensive outpatient treatments such as dialysis and chemotherapy for cancer.

An Integrated Shield Plan provides additional private insurance coverage on top of Medishield Life. This can give you benefits such as covering the costs of seeking healthcare in private hospitals or staying in type A or B1 wards in public hospitals.

WHAT’S NEXT?

Let’s say I purchased an Integrated Shield Plan. What else should I think about?

Ms Viviena Chin, CEO of Eternal Financial Advisory, said the answer is what is called a ‘rider’.

Although an Integrated Shield Plan covers the large bills you incur at the hospital, it is subject to an annual deductible and 10 percent coinsurance. A deductible is an initial amount that you must pay for your healthcare costs before you can claim under your health insurance.

Of the amount remaining after the deductible, you must pay 10 percent yourself and your insurer will pay the rest.

“So you will have to ask yourself whether you can pay the deductible and co-insurance yourself. If not, you have the option to cover that by having a rider patch up that amount, but you will still have to pay a 5 percent co-payment,” Ms Chin explains.

A rider is an insurance policy provision that adds benefits to or changes the terms of a basic insurance policy, such as an Integrated Shield Plan.

Ms. Chin also noted that an Integrated Shield Plan does not provide an additional lump sum payout to replace your income in the event of the diagnosis of an early or serious illness, and that there are insurance plans that do.

She provided this overview of the different types of health insurance I might consider after investing in a hospitalization plan:

• Critical Illness Plan – To pay out a lump sum to replace my income if I am ever diagnosed with a serious illness such as cancer. This could help reduce the financial burden of ongoing follow-up costs.

• Disability Income Plan – To replace the loss of income if I ever become disabled due to an accident or illness and cannot return to work at a stage of life when most people would still be working.

• A long-term care plan in the event of a severe disability – This would help provide monthly benefits in the aftermath of a severe disability should I be unable to perform certain daily activities due to an accident or illness. The monthly payout would reduce monthly running costs, which can be costly.

What about my company’s health insurance?

To be cautious, the short answer is “no” if you are completely dependent on your employer’s insurance.

Financial Alliance’s Mr Tan said: “To play it safe, take out your personal health insurance and ignore what you have from the company. This is primarily because your company’s coverage may be quite low and have different sub-limits.”

He added that the coverage provided is also dependent on a person’s continuous employment with the company, which is not certain.

A company can also change or even eliminate coverage at the next policy renewal, he said.

In the event that someone suddenly suffers from a serious illness such as cancer, he or she may no longer be able to work, resulting in loss of coverage and income at the worst time.

“And after that, you wouldn’t be able to buy personal insurance for yourself because you would already have a pre-existing condition,” he said.

“Even if none of the above happens and you enjoy working there until you retire, there is a good chance that by then you will be suffering from a chronic illness, making you ‘uninsurable’.”

HOW MUCH SHOULD I Spend?

Mr Tan from Providend said some people may advocate setting aside 5 to 10 percent of your income for insurance premiums, but it is preferable to focus on your needs first and cover those needs in the most cost-efficient way .

“This is preferable to sticking to a fixed spending percentage. Everyone’s circumstances can be very different and if someone is fortunate enough not to have many dependents and has simpler needs, then they can spend the savings on other purposes,” he said.

How much is too much?

This is an interesting question, said Mr Pang, the financial advisor, because when everything goes smoothly in life and we don’t have to make any claims on our insurance plans, most of us will feel like we are spending too much on premiums.

However, when disaster strikes, many end up wishing they had invested a lot more in insurance.

And so the key to this, as with most things in life, is balance.

The danger of underinsurance is that we do not have sufficient protection if unforeseen circumstances arise, while overinsurance jeopardizes our ability to enjoy life now or save for the future.

Talking to the financial advisors made me realize the need to really understand the different insurance plans available and how to be careful when choosing what best suits my needs.

As they said, although it can be an exhausting and tedious process, sitting down with someone who can clear things up for you and best explain your different options is ideal, and it is an important step that I’m going to put.

Now that I’ve learned all this, I’m going back to the advisor who sold me the same plan as my sister to review its coverage to make sure it really is ideal for me.

ABOUT THE WRITER:

Natasha Meah is a journalist at TODAY covering healthcare, education, community and finance