Taking adequate insurance cover

Picking the best plan need not be a painful or costly exercise with the right approach
By Aaron Low, The Sunday Times, 8 Apr 2012

Insurance is one of those things we all feel we need, yet many people plonk it in the to-do basket and promptly forget about it.

And it's not as if it's hard to find a reason to put off dealing with insurance: It's complicated, it looks expensive and the returns can look thin and a long way off.

Tackling some of those perceptions is one of the drivers behind a major review of the industry announced by the Monetary Authority of Singapore last month.

The Financial Advisory Industry Review will look at key aspects such as educational requirements of financial advisers, corporate governance and how agents and advisers are paid for their services.

One of the review's key objectives is to lower costs for consumers so that more Singaporeans can take up insurance.

There have been many surveys that show how under-insured Singaporeans are.

An AIA study last year found that only one in 10 Singaporeans has adequate life insurance coverage and very few even regard it as important.

A hint as to why so many Singaporeans have this aversion to insurance came in part with an Ernst & Young survey done this year.

It found that while over half the respondents were satisfied with the industry, dissatisfied respondents were mainly unhappy about transparency of the terms and conditions and a lack of discounts.

It all looks a fertile field for the new review but its work is not expected to be completed until the end of the year, so the implementation of any recommendations is a fair way off.

For those who need to get coverage now, there are some steps that can be taken to ensure you get the most cost-effective outcome.

Shop around for the best deals

For some people, one whole-of-life policy looks like any other whole-of-life policy yet pricing can vary by as much as 50 per cent, says Mr Albert Lam, managing director of financial advisory firm IPP.

'The devil is in the details. One policy may have higher protection, others may have higher guaranteed returns,' he says.

'So you really need to get a sense of what is out there in the market before you put money down on a policy.'

This applies to every category of insurance. Take two plans that appear to do the same thing.

OCBC's School Protection savings plan grants a person protection for up to 18 years but he need pay premiums for only six years.

Policyholders of HSBC's ChildEnrich plan pay premiums for 18 years but their children get protection until the age of 99.

While both plans help provide for your child's needs, OCBC's plan is a vanilla savings plan and HSBC's is both a savings and insurance plan.

Mr Lam says that due to the large number of options on the market, it sometimes pays to get a financial adviser who can help you sift through the plans.

But if you prefer to do it yourself, then make sure that you talk to as many agents from different firms as possible and compare policies.

Buy term and invest the rest

One clear example of the difference in price is term health plans compared to whole-of-life plans.

Both plans provide cover against death and total permanent disability as well as terminal illness but term plans are pure protection policies while whole-of-life ones give an amount of money back, plus guaranteed interest, after a certain number of years.

The other difference is that term plans are extremely cheap and can be bought for just a few hundred dollars a year.

For instance, the Aviva term plan for men still serving national service costs just $12.80 a month for a sum assured of $100,000. This means that if you die due to an illness, the policy will pay out $100,000 to your family.

But the premiums will have to be paid every year that the protection is in force and these will get increasingly more expensive as the policyholder ages.

Whole-of-life plans, by comparison, are more expensive, says Mr Eddy Cheong, Providend's head of insurance.

For instance the annual premium for a typical whole-of-life plan for a 32-year-old man, with coverage of about $900,000, is $17,000, while a comparable term plan costs just $1,300.

Whole-of-life plans sometimes come with a shorter payment period. Manulife's 3G allows you to pay premiums for 10 years, yet the plan will protect the consumer for the rest of his life.

Mr Cheong notes: 'But my view is this - in many cases you can determine whether you need to cover for a fixed duration or whole life.

'For the former, you go for term. For the latter, maybe whole life policy or a term-to-age 99.'

Mr Brian Tan, associate director at Financial Alliance, says that one of the best ways to keep costs down is to buy term and invest the rest.

'Once you are covered, you can use your spare savings to invest in other tools such as unit trusts to get better returns,' he says.

A compelling reason for buying a term plan and investing the rest is that term plans tend to pay low commissions to agents compared to a whole-of-life plan or an investment-linked plan (ILP), says Mr Tan.

'For instance, customers tend to pay higher commissions with ILPs compared with term policies. You may be paying as much as 5 per cent on fees and charges every time you put money into an ILP,' he says.

So instead of buying an ILP with premiums of $200 a month, you could buy a cheap term insurance to cover yourself by paying $13. Then invest the other $187 in a unit trust, stocks or bonds.

'Despite the higher costs, ILPs might be suitable for someone who just wants a one-product solution to both insurance and investment. It's easier to administrate and some people find the discipline of investing the excess cash they save from buying term hard to follow,' says Mr Tan.

In other words, for the financially savvy, buying term and investing the rest is a viable option. For others, it may just be better to buy a bundled plan.

Different models of advice

Most agencies in the life insurance industry use commissions and employ what is known as a multi- tier system where an agent and his bosses get a cut of a customer's premium. The MAS said that this may amount to 160 per cent of an annual premium for a whole-of-life policy, or about 8 per cent of the total cost of the policy over its entire life.

Some firms do not use the multi-tier system of commissions.

NTUC Income is one and claims it has the lowest distribution costs in the industry.

Mr Ken Ng, senior vice-president and general manager of life insurance at NTUC Income, says its agents are managed by salaried managers so 'our sales management cost is a fraction of the average cost in the industry'.

He adds: 'Our expense ratio is also one of the lowest in the industry. Consequently, our selling costs are significantly lower than that of other industry players.'

The chief executive of First Principal, Mr M. Salim, notes that while costs are important, what's more important is that the plan suits the client's needs.

'For instance, there are some people who prefer to have guaranteed returns. This is where insurers who sell whole-of-life policies come in. We can't say they are not relevant as customers do want them,' he says.

Other firms such as Providend employ a completely fee-only system.

Instead of charging for commissions, they charge a one-off fee, which may be anywhere between $2,500 and $4,800, depending on how complex a client's needs are, says chief executive Christopher Tan.

The firm then draws up a financial plan based on the client's needs and profile.

If the client decides to buy insurance, commissions earned by the firm from selling the product will be refunded, he says.

Providend says that for a basic term plan with coverage for death and critical illness, commissions refunded to their clients over the course of the coverage may amount to about $2,700.

But the drawback to the fee-only model is that not all advisers will give you the best advice. And since advice costs money, you may actually end up paying for bad advice.

No surrender

One of the surest ways to raise costs and lose money in insurance is to give up the policy after you have started it.

Of course, if the premiums become a huge drag on your cash flow, then the logical thing would be to give it up.

But since most policies incur a huge penalty if the consumer voluntarily ceases premiums before the policy matures, most financial advisers warn against it.

Says Mr Cheong: 'To surrender a whole-life policy after you have maintained it for 30 years is a lousy decision because the potential payout in the event of claim would have accumulated significantly.'

To this end, the best way to buffer against a sudden need for cash is to simply build up an emergency fund.

The fund should be between six and 12 months' worth of household expenses so the family will have money to spend if the breadwinner is laid off, without having to surrender the policy.