Insurance - that tough burger choice?

"If buying insurance is like a fast-food order..."

If you recall the last time you stepped into a fast food restaurant, you would probably remember being welcomed by a wide selection of available menus. Throw in the occasional promotions and the possibility of customizing your order, and you would probably start to feel a little daunted by the choices. Thankfully, you chanced upon that familiar burger which you are confident will satiate your taste-buds and voila! You are all set to make your order! But just when you thought this decision-making process is over, the friendly staff over-the-counter asks if you would like to upsize your order, your preferred choice of drink, etc. (And not forgetting the chilli/ ketchup to go with the meal)

Unfortunately, a fast-food order is not the most complex decision that we will make in life. Prior to writing this article, I did a simple survey of some close friends who have just graduated from university and it seemed that many are bewildered by the large variety of insurance products available in the industry. This has inspired me to write this article to provide a broad overview of the insurance industry in a succinct and digestible read. 

Insurance Companies in Singapore (“The Fast Food Restaurants”)

Let us begin by understanding the insurance providers in Singapore. Insurance companies (or insurers) are licensed by the Monetary Authority of Singapore (MAS) under Section 8 of the Insurance Act (Cap 142) to conduct life and/or general insurance business in Singapore. 

For the purpose of this article, we will focus our attention on direct insurers. The table below summarises key information of the different types of direct insurers in Singapore.

For a full list of direct insurers and other types of insurers in Singapore (e.g. authorized reinsurers, foreign insurers, etc), click here.

Insurance Products (“The Burger Menus”)

Insurance companies offer a wide variety of insurance products to cater to the varying needs of the population.

Over the years, insurance products have evolved to meet the changing needs of the people as well as manage competition within the industry. For example, some insurance policies even provide coverage for Dengue Fever and Zika virus. However, the greater variety of products is often accompanied by greater complexity. 

In this section, I have provided a list of broad categories that are commonly used to classify insurance products, together with a brief description of their respective purposes. There are many articles/ infographics in the Internet that provide in-depth and clear information about each type of insurance product. You may click on the respective category headers to be redirected to some of these sites for further reading. 

1) Life Insurance: Pays an agreed amount known as the sum assured under certain circumstances (e.g. death, disability, terminal illness, etc). 

• Term Life Insurance: Insurance coverage for specified term with no maturity benefit.
• Whole Life Insurance: Insurance coverage for life, possibly with maturity benefit if insured survives until specified age.
• Endowment Insurance: Savings + Insurance coverage for specified term, with lump sum maturity benefit. Annuities are a type of endowment insurance that protects against longevity by providing periodic income payments.
• Investment-linked Policies (ILPs): Investment + Insurance coverage for specified term. Maturity benefit = cash value of investments

Note that endowment insurance plans and ILPs are often used for savings/ investment purposes. Thus, the insurance coverage for these plans tends to pale in comparison with whole life or term insurance.

2) Health insurance: Provides financial benefits in the event of injury, illness or disability.

• Disability Income Insurance: Provides periodic income payments upon disability.
• Critical Illness/ Early Critical Illness Insurance: Insurance coverage for contracting stipulated critical illnesses.
• Long-Term Care Insurance: Insurance coverage for being unable to perform specific number of Activities of Daily Living (ADLs).
• Medical Expense Insurance/ Hospitalisation Plans: Reimbursement of medical expenses in the event of ill health/ hospitalization.

3) General insurance: E.g. Travel insurance, motor insurance, property insurance, etc.

Other Product-related Decisions (“The add-ons/ upsize”)

After deciding on the type of insurance product to purchase, there are also several product-related decisions that need to be made: 

• Coverage amount: The coverage amount typically correlates directly with the amount of premiums paid (i.e. the higher the premiums paid, the higher the coverage amount). However, certain products such as term life insurance offer a high coverage at low premiums for a fixed period of time. 
• Premium Payment term: This refers to the number of years that premiums need to be paid for the policy to remain active. There are several limited premium whole life insurance policies in the market that allow you to pay premiums for a limited period (e.g. 15 years) and enjoy lifetime coverage. 
• Riders: As the name suggests, riders “ride on” a basic policy by providing supplementary benefits at an additional premium. Examples of these supplementary benefits include the waiver of premium in the event of total and permanent disability, accelerated benefits when contracting a critical illness, etc.  
• Other decisions: dividend payout options, premium holidays, etc.

These product-related decisions or features are often specific to the particular insurance plan purchased. Sometimes, these additional features may make an insurance product more attractive when compared to similar products by another insurer. 

Useful Tips(“Making that burger choice”)

Before committing to an insurance plan, here are some tips to consider:

1) “Know your taste-buds”: Carry out a needs analysis to understand your financial goals and priorities. For example, ask yourself if the purpose of purchasing an insurance plan is to save, invest, or protect your wealth? This may sound like an easy reflection task, but often, individuals are subjected to cognitive biases that might cloud their judgement. Thus, getting a third-party opinion such as from a trusted financial adviser will be useful. 

2) “Understand the burger”: This may sound a little ludicrous in the context of fast-food, but it definitely makes sense for insurance products. Suppose you intend to set aside a portion of your income for savings and investment. Should you consider a plan that can allow for both goals or should you consider two separate plans that is focused on savings and investment respectively? You can refer to the Product Summary that accompanies an insurance policy to understand the purpose of the particular plan and the associated product benefits to ensure that it is aligned to your financial needs. These documents can be requested from your financial advisor (at no charge!) before making any purchase decisions. 

3) “Explore the restaurants”: Keep your options open by exploring products from various insurers to find the one that suits you the best. Here are some useful websites that can be used to carry out these comparisons:

• CompareFirst: Provides comparison for life insurance policies and ILPs in Singapore. 
• InterestGuru: Provides comparison for life insurance and health insurance policies in Singapore. 
• MoneySmart: Provides comparison for general insurance policies (e.g. travel, car insurance) in Singapore. 

However, note that it is rare to discover an insurance product that is superior in all aspects against that of other insurers. In fact, it is likely that products are designed to be superior in certain aspects and inferior in others. This is to encourage product bundling (purchasing a combination of products to cater to your needs). Thus, it will be good to think through your priorities when comparing insurance products!

4) “Stay updated about developments”:  Most people will probably forget about their insurance policies after purchase (try asking your parents/ friends if they remember theirs!). As we progress through our milestones in life, our financial needs and priorities would also change. Thus, it is important to constantly review your needs to ensure that they are being well-addressed. Apply the FOMO (Fear-Of-Missing-Out) attitude here as well! Once in a while, a “star” plan might appear in the industry or there could be a limited-period promotion for a particular plan. A simple solution is to get your trusted financial adviser to keep you updated on such news!

When faced with complex decisions, many of us will probably feel intimidated or even procrastinate (“I will think about it another time”). I hope that this article has provided you with a broad overview about the insurance along with useful tips to approach this complex decision-making process. When you step into a fast-food restaurant next time, hopefully it reminds you to take a bold step to manage your personal finances better! 

*The author is a final-year undergraduate in the SUTD-SMU Dual Degree Programme and is a keen advocate of financial literacy. The article presents the independent opinion of the writer and does not necessarily represent the views of any associated organisations. It is intended for general education only and does not form part of any offer or recommendation, or have any regard to the investment objectives, financial situation or needs of any specific person. 

*If you feel that you have learnt something new from this article, please feel free to share this piece of knowledge! Comments and suggestions for improvement are welcome as well!