An Easy Guide to Understanding Insurance
Life can be confusing and complicated at times, but buying life insurance does not have to be. Although life insurance comes in many different forms to serve different needs, its primary function is to provide financial protection. This means that if the unfortunate were to happen to you (e.g. you need to be hospitalised or die prematurely), the insurance company would pay out a sum of money to help ease the financial burden upon you and/or your family.
There are three layers of insurance protection:
Provided by national schemes like those from the Central Provident Fund (CPF) in Singapore, these cover the basic requirements and are available at affordable premiums. Such coverage includes Medishield, Eldershield, CPF Life, Dependants' Protection Scheme (DPS) and Home Protection Scheme (HPS).
Provided by employers, unions or associations, group insurance premiums are also relatively affordable. However, the coverage stops once you leave the organisation and set age limits tend to result in less coverage when it is most required.
Purchased on a personal level to supplement and enhance social and group insurance, individual insurance has four different classes - Life Insurance, Health Insurance and Personal General Insurance:
The three traditional types of life insurance are:
- Term Insurance
Protection is for a fixed period. The policy pays the sum assured plus any bonuses accumulated either at the end of the policy term or if you die or are permanently disabled during the policy term. While it is typically cheaper than other forms of life insurance, there is no surrender value when the policy ends or if you stop it early. It is normally renewable when each term ends. Examples of term insurances are CPF's DPS and HPS schemes.
- Whole Life Plans
These offer lifelong protection as long as premiums are paid. They normally have cash values that can be withdrawn in the form of a policy loan in case of an emergency. “Riders” to cover illness and total permanent disability can be added.
- Endowment Insurance Plans
These are aimed at building your wealth and at the same time, providing you with basic protection over a fixed policy term. Endowment insurance plans can give potentially better returns than regular savings in a deposit account. Also, they promote a routine of setting aside funds regularly for the premium. Although the returns may not be as high as other investment products such as stocks and shares, endowment plans are generally considered a good option, as they are less risky. Unlike a bank account you are not able to withdraw your money as and when you please from your endowment policy. If you do so before it matures, you could suffer a loss. But if you wait until the policy matures; you could potentially receive more money than you paid in.
In Singapore, basic health insurance is covered by CPF’s Medishield and other private shield plans. These plans are most suitable for covering medical and on-going treatments, and are especially important with our rising medical costs.
There are also policies that cover 37 selected critical illnesses (including: cancer, heart attack, stroke, etc.). The insured will get a lump sum benefit if diagnosed with any of these illnesses, although other riders can be included.
Personal General Insurance
These policies usually provide coverage for your car, household, valuable items and personal accident.
In conclusion, there is the right type of insurance to cover you at every stage of your life. To ascertain your needs and budget, it is a good idea to talk to a financial consultant and then get quotations from different sources. This will empower you with the confidence that you are adequately covered to protect yourself and your family.