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What is the purpose of insurance and are you overpaying?

Friday, September 18, 2015

Regular readers know that I have blogged about the need for having the necessary insurance and how the amount of insurance should be adequate. We also want to make sure that we do not overpay for insurance.

Do you believe me if I were to tell you that many people are paying a lot of money for insurance but are still severely underinsured. 

In fact, a reader wrote to me today to say that after reading my blogs on insurance, she believes that her husband who recently bought a $100K life insurance policy might have paid too much. The premium? $3,500 a year. Wow!

If we think that a young couple with kids might need $1 million of life insurance coverage each, it could amount to quite a bit of money every year. $1 million sounds like a lot to you? 

Well, in case they were to pass away at a relatively young age, $1 million might not be much if we know how much it would cost to bring up a child in Singapore and the cost of bringing up a child is something I have blogged about before. 

$1 million life insurance coverage. How much would the premium be? Well, the good news is that it need not cost a bomb. 

There is a simple tool available to us and we can find out about our life insurance coverage needs using a simple calculator by DIYInsurance: Click Here.

Remember, just because we pay a large amount of insurance premium does not mean that we are getting adequate insurance coverage.

Let is look at an example of a male non-smoker:

•        Policy coverage till 65 years old (when children become independent)

•        S$1 million Death and Total Permanent Disability Coverage

These are the annual premiums payable to various insurers in Singapore (S$): 

*With information from  and comparefirst. Figures are compiled on 14th September 2015 and includes existing promotions and discounts which are in the knowledge of.

**You are advised to approach a financial advisor for his/her opinion on the features, details and current quotes of the products or if you are considering to purchase, if you should surrender or restructure your existing insurance policies. 

You may want to do a review of your insurance coverage and premium paid. Compare what you are currently paying for your insurance policy against what is currently offered by the different insurers. 

For us to be covered by life insurance for our entire life, it is very expensive to do so with whole life insurance. In many instances, we may find that we are not able to get adequate insurance at an affordable price. 

For a 30 year-old male, a $500,000 whole life coverage could cost S$7,000 annually* (paid annually) for 49 years! 

Are you overpaying for the insurance coverage you have? Are you sufficiently insured?

Purchasing a term insurance is the value for money way to provide for sufficient coverage. To understand the case for Term Life Insurance: Read here.

Many people don't actually understand what is the purpose of having insurance and this is why they end up buying all sort of unsuitable products. 

The purpose of insurance is to transfer our risk of a loss to another party in exchange for money. It is important that we adequately transfer our risk (i.e. sufficiently insure ourselves) and to keep the cost that we are paying for insurance low. 

However, there are many misconceptions when it comes to insurance and here are some common ones: 

a.        "I need life insurance coverage for my whole life.

Our financial obligations tend to decrease as we age due to the fact that, as our dependents grow older, they are dependent on us for a fewer number of years. We should have also built up sufficient assets such that if an unexpected event were to occur, we would have sufficient assets to leave behind for our dependents to live on. There comes a point of time in our life when we do not need any life insurance coverage to provide for our loved ones as they are no longer dependent on us financially.  

b.        "Whole life insurance is always better because I may only have to pay for a limited number of years and I can save as well.

For insurance companies to craft a policy where it is possible for one to pay only for a limited number of years, it means that a lot more has to be paid for the initial years to compensate for the other remaining years. If we are using whole life insurance for savings, for the low liquidity and returns it provides, we could use many other investment tools which allow us the flexibility to draw our money when we need to without any penalties and possibly achieve greater returns with them. 

c.        "More coverage is always better." 

This only holds true if we do not have other financial commitments. Accumulating enough funds to retire is not easy to achieve. In a study done by AIA in 2014, 55% of Singaporean respondents were worried they would not be able to save enough as compared to a regional average of 44%. More worryingly, 35% of Singaporean respondents ranked saving for retirement as the most difficult goal to achieve in life. If we decide to spend more on insurance, something else has to go. This could mean prolonging our working years and pushing back our retirement age.  

Understand what is the purpose of insurance and buy insurance because we need insurance and not anything else.

To compare and purchase insurance, consider DIYInsurance - Singapore’s First Life Insurance Comparison Web Portal by Providend Ltd. 

DIYInsurance aggregates products from various insurance companies and provides 30% commission rebates in addition to ongoing promotions, if any.

Staff from DIYInsurance are all paid fixed salaries and do not participate in sales-based compensation or incentives of any kind.

Not being remunerated on a commission-basis means there is no hard-selling and over-selling. They provide advice on insurance based on no one’s agenda except your own. Request a Term Life Insurance quote through DIYInsurance by clicking Here.

Understand and help to share your understanding on the purpose of insurance and the importance of insuring ourselves sufficiently. 

Buy the right type of insurance and don't overpay. 

Being adequately insured does not have to cost us an arm and a leg.

This is a sponsored blog post brought to you by the good people at DIYInsurance.


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