5 Factors To Consider When Committing To Buy Insurance

By Lim Si Jie, 31 December 2018 706

Buying insurance is a huge long-term commitment. From the moment you start paying for it, you’ll need to sustain it anywhere from one decade to a few (depending on the premium term). Each  insurance decision you make can be life changing. Thus, you need to consider as many factors as possible to make sure that you make the best possible insurance move for you and your loved ones. 

For anyone thinking to buy an insurance plan, these are five factors that you should take into consideration.

1.    Reputation / Financial Health Of Your Insurer

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When it comes to buying things that require a huge financial commitment, the credibility of the seller is an important pre-requisite. When you buy a resale flat, you would do cross-checks on the home seller from whom you are buying. When buying a second-hand car, you would consult your friends or forums on the credibility of various car dealers. Likewise, when buying insurance, the same kind of checks should also be done.

Insurance is essentially a contract of agreement between you and the insurer that offers you financial protection. It is a long-term contractual commitment from your insurer to you that could easily last 20, 30 years or even a lifetime. Thus, you want to make sure that your insurer is not at risk of going bankrupt, so that they can meet their contractual obligations and provide the payouts as promised. 

The kind of financial worries you could face if your insurer becomes bankrupt is unimaginable. Not only would you have to fight to get your premiums back, you would also have to source for a new insurance plan. What’s worse is that you won’t get the same kind of deal you had initially because the risk of insuring you will most likely increase over the years. 

For starters, you may want to examine the credit rating of the insurer, given by one of the three credit rating agencies (Standard & Poors (S&P), Fitch, Moody’s). Each insurer is given a credit rating that defines how likely they are able to meet their financial obligations, including the contractual obligation with you. Another thing which you can do is to check whether the insurer is a SDIC Policy Owner’s Protection Scheme (PPF) member. Under the PPF Scheme, you will get protection for the obligations that the insurer had promised you in the event they go bust (subject to caps where applicable). You won’t have to worry as much given SDIC’s safeguard for you. 

2.    How Your Insurance Works

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An important factor to consider when buying insurance is whether you really understand how it works.

If you ask your friends whether they own an insurance policy, most of them might say yes. But if you ask them whether they know what their insurance protects them against, they might not be able to give you a satisfactory answer, let alone explain to you how their insurance works. As an insurance policyholder, it is important for you to know what you are paying for!

We are not saying that you need to know the whole mechanics behind insurance (like how it is priced or how the benefits work). However, you should be aware of the different circumstances under which you can make claims on your insurance policy. This will help you to get a clear idea on the kind of protection you need before you commit to buy the insurance. Understanding how your insurance works and circumstances under which you can make claims  will also help you to avoid having overlapping coverage. Thus, having a good financial advisor who is able to summarise how your insurance works is important.

3.    Does Your Insurance Suit Your Needs?

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Before you make the financial commitment to buy insurance, ask yourself this question: How does this insurance plan fit into my needs? Every type of insurance plan is meant to offer financial protection for different aspects of your life. 

For example, health insurance is meant to offset your potential hospitalisation bills. On the other hand, life insurance is meant to offer financial protection for your loved ones should a life changing event (e.g. accident or disability) or death take place. Critical Illness (CI) insurance pays you a lump sum upon diagnosis of a CI so that you can defray your medical costs and maintain your current lifestyle while recuperating.

Thus, you need to be very clear about the purpose of owning the insurance plan and how it fits into your financial game plan. If not, you will end up spending money on a protection plan that doesn’t suit your needs. It is recommended that you review your insurance regularly given that your needs can change as you progress into different stages of life.

4.    Think About Protection Needs First, Then Consider Your Wants

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The primary objective of buying insurance is for protection, especially for your loved ones. But most people find insurance both morbid and unexciting, especially when we are paying premiums without “seeing any real tangible benefits”. Thus, it is human nature to seek more exciting financial products like investments where we can see our money growing. 

However, insurance is the foundation of financial planning. It is a need, rather than a want. You cannot start your financial planning by thinking about investments first. Rather, you need to start your financial planning by first thinking about the types of insurance you need. 

Protection needs like hospitalisation and surgical expenses, death, total and permanent disability, and critical illness coverage are basic insurance coverage to protect you or your dependants against an undesired situation. Once you have covered the basics, you can then start to explore the good-to-haves like investments or saving plans.

5.    Keep Your Insurance Premium Affordable, Avoid Overbudgeting

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Since insurance is the cornerstone of financial planning, you should get as much of it as you can, right? Well, not quite. Besides considering whether you need the amount of financial protection that you are seeking, you also need to consider whether you are able to afford the premiums. If you overcommit on your insurance budget, it can be detrimental to your financial game plan. 

Overcommitting your insurance budget can lead to unwanted early termination of your insurance policy. This happens when you are unable to continue paying your premiums due to other financial commitments (e.g. housing, marriage or car loans) or even retrenchment. You might end up having to forfeit protection that you really need.

Feel Ready To Buy Your Own Insurance? Or  Need More Help?

After understanding the considerations when buying an insurance plan, you should be confident and ready to take the first step to buy your insurance. For those of you who are still feeling lost, why not visit Adviser Connect to speak to a financial planner now.

This advertisement has not been reviewed by the Monetary Authority of Singapore.