The process of comparing and buying insurance can be so tedious that, once it’s done, you might be tempted to forget all about it and go back to living your life.
Sorry to ruin your day, but you’re going to have to repeat the process every few years!
Insurance policies don’t maintain themselves. While most insurance agents do check on you and do portfolio reviews regularly, it’s a good idea to review your own insurance policies so you know exactly where you’re at.
Why bother to review your insurance policies?
Ugh, why are we giving you all this extra work? Well, there are a few reasons to do so…
- Adjusting for new circumstances: You may need to revise your policies to reflect life changes, like getting a new home or a baby. These increased liabilities mean you’ll probably want to rethink your sum insured.
- Accounting for inflation: That old insurance savings plan you signed up for back when policemen still wore shorts? Yeah, you probably want to relook that one to keep pace with inflation.
- Potential cost savings: New insurance products come out all the time, so it’s worth checking out what’s on the market. If there’s a new policy offering better coverage at lower prices, why not switch out and save a bunch on your insurance premiums?
Here’s how to do it.
Step 1: Set a date for your insurance policy review
Set a review date for your insurance policies. This is usually done every 3 to 5 years. Any earlier, and you might not want to switch policies anyway (you might forfeit some returns).
Most insurance agents call every 6 months anyway, which makes them a perfect reminder system. When you talk to yours, make it a habit to end with this question:
“By the way, when was the last time we looked over my payouts, coverage, etc.?”
If it’s been 5 years or more, consider making an appointment. You’ll want them to walk you through the benefits, returns, conditions, etc. again. Because in a short while, you’ll be shopping around and seeing how it compares to current policies.
Step 2: Consider the costs of surrendering your policy
Before you even think about switching up your insurance policy, check the benefits illustration. That’s the reel of numbers the insurance agent gave you, donkey years ago when she cornered you in Burger King.
For “protection-only” policies like health insurance and term insurance plans, this doesn’t matter. The premiums all go to insurance coverage and there’s no cash value anyway. But if you’ve developed any health conditions in the meantime, you might find it difficult or expensive to be insured anew.
You need to calculate if you’ll make a loss if you surrender the policy. Do this by looking at the total premiums paid so far, minus the (lowest) surrender value at that point. There might also be additional fees or charges if, say, there was a lock-in period.
Let’s say I’ve had this policy for five years, and it cost $3,000 a year. So I’ve paid $15,000 in premiums so far. My policy’s surrender value stands at $10,000. If I forfeit this policy, I’d lose $5,000 (or more, if there are additional fees.)
That’s quite a lot! But remember, I’m paying $3,000 a year for this. If I can find a comparable insurance policy at a fraction of the price — let’s say a term insurance policy — I might be able to recoup the losses in a couple of years.
Step 3: Compare other insurance policies
For each type of policy, talk to a few insurance agents, get benefit illustrations from them. Try to get at least 3 to 5 benefit illustrations, to compare.
Now, repeat the process in step 2 for each benefit illustration.
If you only buy term insurance, it’s a lot easier to compare. Just look at the premiums for policies with comparable coverage, and pick the cheapest.
For insurance policies with an investment component, it’s a lot more complex. You’ll want to have your agent help calculate your losses (if any) if you switch to a new candidate.
Apart from looking at premiums and coverage, you’ll also want to look at how the surrender value is calculated. Some policies offer zilch surrender value in the first handful of years, which is tantamount to a lock-in.
As you’re making comparisons, you’ll realise “cheap” isn’t the only consideration. The next thing you need to compare is…
Step 4: Check your insurance policy coverage specs
Assuming you’ve found a couple of contenders for your new insurance policy, you’ll want to check the specs for “catches” like co-insurance, deductibles, and waiting periods.
Co-insurance and deductibles apply to health insurance, which is heavily regulated in Singapore. The rules might change every few years, and you’ll want to be prepared.
For example, full co-payment Integrated Shield riders have now been outlawed, and insurers can only sell riders that involve a 5% co-payment in your part. While you’ll likely save a bundle on your new policy, you also need to beef up your emergency fund because you’ll need to pay more if you get hospitalised.
Have the insurance agent walk you through these. If you’re uncomfortable with any of the terms, check out other insurers and see if they have a more appropriate policy.
You also want to pay attention to the waiting period, which typically applies to insurance policies like critical illness plans. This refers to the length of time before you can make your first claim.
For critical illness, the Life Insurance Association stipulates a 90-day waiting period. But there might also be other waiting periods for things like re-diagnosis or recurring illness.
Step 5: Who invests in funds you’re comfortable with?
With endowment, whole life, or investment-linked plans, the returns on your policy are gained by investing your money. All those premiums you pay? The insurer takes that money, and puts it into different funds to grow it.
The performance of the funds, which your premiums are invested in, determine the size of your eventual payout. Now you know why the surrender values are “non-guaranteed”.
Some insurance agents will ask you how you want your premiums invested (e.g. what percentage do you want in equities, and what percentage in fixed income funds?). Which, if you’re a layperson, is like having your surgeon ask how you want your appendix removed.
But you might be asked anyway, and then you need to consider: Are the funds you’re investing in risky?
You don’t want to pay premiums for 20 years, then find out the funds were crap. And your returns after the effect of deduction are, like, two bucks.
To be able to answer that question, you need to understand more about investing — might we point you to the Invest section of MoneySmart?
Found this article useful? Share it with anyone else who might benefit.