In theory, your insurance agent is supposed to check on you every six months. Unless you have an agent like mine. “Why, is she careless?” Nah. She stopped calling because I used every meeting to describe diseases I think I have. They typically feature words like “oozing” and “pustule”, and I have pictures from medical books. That I show her over lunch. But anyway, it’s a good idea to set up your own insurance reviews and actually figure out where you’re at. Here’s how:
Step 1: Set a Review Date
Set a review date for your insurance policies. This is usually done every three to five years. Any earlier, and you might not want to switch policies anyway (you might forfeit some returns).
Most insurance agents call every six 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 five 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: Understand How Much Your Policy Costs
Quick, without checking: How much in commissions (approximately) are you paying the agent? How about the insurance company itself?
You can find these in the benefits illustration. That’s the reel of numbers the insurance agent gave you, donkey’s years ago when she cornered you in Burger King. There are five main columns to look at:
Annualised Premium – How much you pay in premiums every year.
Total Premiums – The total you’ve paid so far, in premiums
Total Distribution Cost – Most of this money is given to the agent, as commissions.
Non-Guaranteed Surrender Value – This is the big payout you’ll get, when you surrender the policy. It’s guesswork, as the term “non-guaranteed” implies. You may be getting a lot less than what’s stated here.
For insurance-linked plans, it’s common for the illustrations to assume returns of 5% to 9%.
For life insurance, it’s common to see assumed returns of 3.75% to 5.25%.
Effect of Deductions – Less money, that’s the damn effect. But the number in this column indicates the insurance company’s fees; it’s how much they’re taking from you to maintain the policy.
Here’s how you get a rough estimate of how much the policy costs:
First, add up your savings. Do this by adding the total premiums to the non-guaranteed surrender value. Always use the lower surrender value. For example:
Say my total premiums paid, in year 5, comes to $15,000.
My surrender value, at 5% returns, is $10,500.
My total savings would be ($15,000 + $10,500) = $25,500
Next, figure the percentage that the effect of deductions removes from the total savings. So, going back to my example:
On year 5, my stated effect of deductions is $7,500. So the percentage of savings paid to my insurer is ($7,500 / $25,500), or around 29.4%. Think of it as the insurer’s “service charge”.
Do note that 29.4% is a big chunk. Financially choosy types will tell you anything above 20% is too high.
Also, note that term insurance has no savings; 100% is paid to the insurer. That’s why it’s called “protection only” insurance.
Now you know that, let’s move on to…
Step 3: Compare Prices with Other Policies
Talk to other insurance agents, and get benefit illustrations from them. Try to get at least three to five benefit illustrations, to compare.
Now, repeat the process in step 2 for each benefit illustrations. Ideally, you want the insurance policy with the lowest percentage of savings deducted. Again, the ideal is around 20%, although few policies are that cheap.
If you only buy term insurance, comparison is much easier. Just compare the premiums, and pick the cheapest.
But as you’re making comparisons, you’ll realize “cheap” isn’t the only consideration. The next thing you need to compare is…
Step 4: Who Invests in Funds You’re Comfortable With?
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 find out more about equities and investing, follow us on Facebook. Or if you just aren’t comfortable with the idea, consider switching to term insurance. There are no payouts, but there are no investment decisions either; and it’s often less than $50 a year.
Step 5: Check “Per Day” Benefits
Some life insurance policies have a “per day” benefit. This is the amount of money you can get per day, in addition to schemes like Medisave, when you end up attached to an IV tube.
If your health is becoming a major concern, shop around. Look for the best “per day” benefits, and do some homework on the claims process. Google the insurer’s name, and look for any complaints about issues such as slow payouts.
Step 6: Check Co-Insurance, Deductibles, and Deferred Periods
Remember that medical insurance might not completely cover the cost of operations or hospital stays. Also, some policies don’t cover specific costs (e.g. medication costs, or radiology).
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 deferred periods. This refers to the length of time involved, when it comes to making claims. If you’re working on a tight budget, you might want to switch to a policy that’s faster with benefits.
Had any good/bad experiences with your own insurance review? Let us know here!