Insurance 101 Guide

(http://investmentstab.blogspot.sg/p/insurance-101-
guide-guide-that-teaches.html)

Insurance101Guide
Theguidethatteachesyouhowtogetcostecientinsurancecoverage

Firstpublished2015

Insurance101Guide
Copyright2015
Allrightsreserved.

___________________________________________________________________________

DearDistinguishedSubscribers,
Thank you for supporting us, our blog, and for reading our financialrelated posts. It is
becauseofyouthatwewereabletoconsistentgrowourviewershipinamaturedblogging
space.

As mentioned in the previous blog post, we have been busy gathering more information
about Direct Purchase Insurance (DPI), an insurance initiative launched recently by the
Monetary Authority of Singapore (MAS). For personal reasons, we have spoken to
investment advisors, insurance agents and attended a talk organised by a DPI provider
(DIYinsurance), all to better understand how we can minimise our insurance cost while
maximisingcoverage.

WewouldalsoliketothankandcreditMrChristopherfromProvidendorganisingthe
DIYinsurancetalk.Thetalkwasextremelyinformativenotonlyaboutthenewinitiativebut
alsoaboutinsurancecoverageeveryoneshouldhave.Youcanvisithiswebsiteat:
http://www.providend.com/(http://www.providend.com/)and
http://www.diyinsurance.com.sg/portal/home/index.jsp
(http://www.diyinsurance.com.sg/portal/home/index.jsp).Youcanalsovisitourwebsite
http://investmentstab.blogspot.sg/(http://investmentstab.blogspot.sg/)formoreinformation.

___________________________________________________________________________

Disclaimer
The below content is just an opinion and may not be factual. It is not intended to be any
representaonofanysortsandshouldindividualswanttoobtainanyformofnancialinstruments
asdiscussedbelow,theyshouldconsulttheirrespecveauthorizedadvisers.Anyopinionsexpressed
inthisreportaresubjectedtochangewithoutnoceandanyaliatedsitesorauthorsarenotunder
anyobligaontoupdateorkeepcurrenttheinformaoncontainedherein.Anyreferencesmadeto
third pares are based on informaon obtained from sources believed to be reliable, but are not
guaranteed as being accurate. This report has no regard to the specic investment objecves,
nancial situaon, or parcular needs of any reader. Informaon, tools and arcles published are
solelyforinformaonalpurposesandarenottobeconstruedasasolicitaonoranoertobuyor
sellanysecuriesorrelatednancialinstruments.

Theauthorofthisreportshallnotbeliableforanydamagesorlossesincurredasaresultfromthe
below content and users are to exercise cauon and their own judgement when using these
informaon.
___________________________________________________________________________

ShareWithYourFamilyandFriends!

Feelfreetosharethisreportifyouthinkthatitisbenecial.Howeverpleasedonotchangeanypart
ofthisreport.Thankyou.
___________________________________________________________________________

Asyouallknow,insuranceissomethingyoupayforbuthopethatyouneverhaveto
exerciseit.Itisatransferofriskfromyoutoyourinsurancecompany.Beforeyoubuyany
insurance,youmustfirstdeterminehowlongyoushouldbecovered,howmuchtobe
covered,andwhattypeofinsurancetobuy.However,Iwouldliketoaddthelaststep:who
youbuyyourinsurancefrom.

Forthesakeofsimplicity,thisarticledoesnottakeintoaccountthefuturevalueofthe
eachcost.Thisisalsoasimplifiedclassificationofinsurancethatismeantforeasy
understandingoftheproduct.

___________________________________________________________________________

LifeInsurance
WhatisLifeInsurance?

Lifeinsuranceisaninsuranceyoubuyforyourdependents(beneficiary)whenyouarealive.
Uponyourdeath,thebeneficiarywillreceiveasumofmoney(benefits).Thesumofmoney
ismeanttoreplaceyourfamilyslossofincomeintheeventofyourdeath.

1.Howlongshouldyourcoveragelast?

It is recommended that the insurance should last either till your retirement or until the age
yourdependentsarefinanciallyindependentofyou,whicheverislater.Youmayalsochoose
tocoverforyourspouseslivelihoodfortherestoftheirlifealthoughitisrarelynecessary.
Illustration1:

Youhaveafamilyof3childrenage21,18and13.Assumingtheywillbefinancially
independentaftertheyfinishtheiruniversity,approximatelyage24,youwillhaveto
planandprovideforthem11yearsworthofcoverage(24minus13).Youmayalso
wish to include a plan for your spouses future living expenses. You will need
insurance to provide a source of income for your family during the period where a
mishapimpairsyourabilitytosustainyourfamilyslifestyle.

Illustration2:

Youandyourspousehaveretiredandyourkidsarealreadyfinanciallyindependent
of you. You wish to ensure your spouses livelihood is not impairs in the event of
yourdeath,thusyouextendyourlifeinsurancecoverageperiod.
However, when you reach your retirement, you will usually have a retirement fund
forbothofyou,andyouspousecouldrelyonyourkidsforextrasupport.Thusthis
extendedinsuranceisrarelyrequired.

2.Howmuchshouldyoubecoveredfor?

To determine how much you should be covered for, you need to evaluate your familys
currentandfutureexpenses.Thisvariesfrompersontoperson,buttheytypicallyconsistof
loans(mortgage,carandcreditcard),dependentsfutureeducationcost,andmonthlyliving
expenses.Themonthlylivingexpenseisoftenthemoreimportantfactorandtheinsurance
shouldbeplannedtoensureminimaldropinyourfamilysstandardofliving.

Basiccoststhatyoushouldtakenoteof:
1.Currentdebts(orpredictablefuturedebtsthatyouaregoingtoundertake)
2.Currentincome(orincomeprovidingsatisfactoryqualityoflife)
3.Futureobligations(eg.Dependentseducation)

After determining all the cost you have to cover, take that amount and minus away the
coverage and savings you currently have. Examples include mortgage insurance (pays off
your mortgage in the event of your death) and your savings and investments. This is an
extremely crucial stage as you must check carefully what coverage and other sources of
wealthyouhavetoensurethatyoudonotoverlyinsureyourselfunnecessarily.

Illustration:

Youarecurrently30yearsold,married(spouseage30)with1childrenage5.You
wouldliketocoveryourfamilyuntilyourspouseretiresatage65.Yourfinancesand
howmuchyouneedtobeinsuredwilllooksomethinglikethis:

Item Amount Total

MortgageLoan 200,000
CarLoan 20,000
35yearsLivingExpenses 630,000
ChildrenEducationCost 20,000
TotalSumRequired 870,000

MortgageInsurance 200,000
Savings 15,000
Investment 20,000
TotalSurplus 235,000

RequiredCoverage 635,000

Base on the calculations, you would be required to insure yourself a sum of

 $635,000toensureyourfamilyisnotaffectedbythelossofincomethatcomeswith
yourdeath.

Thesecalculationsarebasedontheassumptions:
Zeroinflationrate(forsimplicitypurposes)
Monthlylivingexpenseof$1,500
Childrennotgoingtocollege
Funeral prices are not included as it varies based on personal preference.
However,itisbestestimatedtobe$6000asanaverage.

*ForSingaporereaders,docheckyourCentralProvidentFund(CPF)onwhat
coverages you currently are optedin. You might have signed up for a housing insurance
(HomeProtectionScheme)andlifeinsurance(DependentProtectionScheme)withoutyour
knowledgeasthesearemostlyautomaticoptedinschemes.Thiscanhelpyousaveupon
insurancepremiumsbynotdoubleoroverinsuring.

Whileitishighlyimpossibletoinsureorprotectyourentireassetorreplaceyourfullincome
due to its costs, it is important to use insurance to limit the losses or drastic change in
lifestyle,shouldaneventhappen.Thiscanbeillustratedusingthechartbelow.

Atypicalindividualsassetandincomelevelthroughouthislifecanbeasstipulatedbelow,
whereitincreasestoapeak,beforedecliningdown.Thispeakishappensduringthepeak
of your career, which then steadily decreases. Using this curve, we can use it to better
understandthelevelofinsuranceneededandthebenefitsofinsurance.

(http://2.bp.blogspot.com/JCPo0vr5Zgg/VieXX55Nr9I/AAAAAAAAAZk/eRrfB_A_iAc/s1600/graph1.png)

Thegreenandredlinedenotesthelevelofprotectionatdifferentstagesoflife.Whenone
juststartedhis/hercareer,hemightwanttojusthaveminimumprotectionjusttoreplacehis
current income level, should anything happen to him. As he slowly progresses further, his
incomeorassetlevelincrease,followedbyhiscommitmentsashestartsafamily.Thisthen
translate to a higher level of protection needed as the amount needed to be secured is
higher.Ashiscommitmentsdecrease,theamountheneedstoinsuredecreasesaswell.

Due to costs, it is highly impossible and not recommended to insure entirely based on the
blue line depicted in the graph, although this is the perfect scenario where most people
wouldhopetoachieve.Itisasimilarconceptasthestoploss.Hence,theaboveframework
toprovideabetterunderstandingofhowinsurancecanbeusedeffectively.

3.WhattypeofInsuranceshouldyoubuy?

Before doing any insurance purchasing, it is always best to understand what type of
insuranceisavailableinthemarketandwhataretheprosandcons.Thereare4maintype
oflifeinsurancefromcheapesttomostexpensive:

I.TermLife
II. WholeLife

III. Endowment

IV. InvestmentLinkedProtection

Term WholeLife Endowment Investmentlinked

policies(ILP)
Temporary Wholelife Temporarypolicy Durationas
protectionwhich protection uptoacertainage specifiedby
uptoacertainage customer

Pureinsurance Insurance+cash Primarilyusedfor Investment+

tool benefitfunction disciplinedsavings protectionfunction
+investment
function
Investsinthe Investsinfunds Investsinexternal
fundsmanagedby managedbythe unittrusts
theinsurance insurance
company companyor
externalunittrusts

3a)TypeofLifeInsurance

I.TermLifeInsurance

Thisisaninsurancethatcoversyouforaspecificperiodasstipulatedbyyoueg5
yearsor30years.Itisthecheapestandmostspecialisedformoflifeinsurance.It
protectsthedesiredrisk(death)andnothingelse.Ifusedintelligently,itcanbethe
bestandmostcosteffectiveformofinsurance.

II.WholeLifeInsurance

ThisisaninsurancethatcoversyouforyourentirelifePLUSasavingsfeaturethat
provideyouasumofmoneyifyoudecidetocancelyourpolicyduringthecoverage
period. The premiums paid are split in a fixed percentage throughout the whole
periodintoinsuranceandinvestment.

The savings is accumulated by the insurance company investing a portion of your

insurancepremiumsintofundsmanagedbytheinsurancecompany.Theinsurance
agentalsodrawsahighercommissionfromsellingsuchinsurancecontracts,soless
ofyourpremiumsareactuallypaidforprotectionorforsavings.

Illustration:

(http://2.bp.blogspot.com/

FYXp_TvReYE/VieYB7kbEtI/AAAAAAAAAZs/sohij4Hv3tM/s1600/graph2.png)
 III.EndowmentInsurance

Endowmentpoliciesaredesignedtopayoutthebenefitswhentheinsuredperson
dieswithintheinsuredperiodorwhenthematurityofthepolicyisreached.Thisis
like a termlife insurance contract with a savings function embedded. While the
returns from such policies are not high, they can be used to enforce discipline to
save.

* You could purchase termlife insurance and use the difference in premiums
betweentermlifeandendowmentpoliciestoinvestforhigherreturnsorputitina
FixedDeposit,whereyoumostlikelywillnotbeabletotouchthemoneyandcanget
abetterreturn.

IV.InvestmentLinkedPolicies(ILP)

Thispolicyissimilartowholelifeinsurancepolicyhoweverthedifferenceisinthe
amount of your premium going towards your life insurance and the
savings/investment portion. While whole life insurances premium is split into
insurance and investments in fixed proportion throughout the whole period ILP
usually put more of your premiums into the investment side when you are young,
gradually shifting more towards the life insurance side as you age. Although most
people buy into such insurance policy to achieve investment and insurance
coverage,theyendupbeinginadequatelycoveredforboth.

Thereasonforthisshiftingfrominvestmenttoprotectionasyouageisbecauseyou
needmoreprotectioncoverageasyougrowold.Thelessmoneyyouhaveinyour
investment,thelessyoucandrawoutwhenyouwishto,whichisnotnecessarilya
good thing when you are in your retirement stage. Beyond that, the returns
generatedbysuchpolicesareusuallyprettylow,rangedbetween3%5%.

Illustration:

$1ofPremiumspaid

(http://1.bp.blogspot.com/L5jrscADuVA/VieYxqJ2tiI/AAAAAAAAAZ4/c65JKeAD4HA/s1600/graph3.png)

3b)Whatinsuranceshouldyoubuy?

Thisreallydependsonyourindividualneedsandrequirements.Ifyouwouldliketo
havepurelyaninsuranceprotection,termlifewouldbemoreworthwhile.However,if
you like to have insurance linked with investments or savings, then the other 3
insurancepoliciesarealsoworthconsidering.
 4.WhoshouldyoubuyyourInsurancefrom?

Whenwedidaresearchoninsuranceagentscommission,wefoundthateachagentwillearn
approximately 40%70% commission from the rst premium paid by their new clients. They
will connue to draw commission from the premiums in subsequent years but in smaller
proporons.

Whileitmayseemthatwearepayingalottoinsuranceagents,theyactuallyprovidegreat
help when it comes to handling your claims when required. From personal experience, we
knowthatitisdicultforindividualstohandlethepaperworkrequiredtomakeclaims.

Itisrecommendedthatyouapproachagentswhomyouarecomfortablewithandwhomyou
know which insurance company they have links with as it is possible for agents to have
linkageswithupto3companies.

Thereisamethodyoucouldemploy,whichistopurchaseaDPIfromaproviderandshould
you need to claim from the insurance company, the service personnel would assist on the
maer.Thisisnotonlycosteecvebutalsoachievesthepurposeofinsurance.However,do
notethatthisissllrelavelynewconcept.

If you would like to nd out more informaon, do visit and drop us a comment at
hp://investmentstab.blogspot.sg/(http://investmentstab.blogspot.sg/)

Summaryofthegeneralcharacteriscsofeachtypeofinsurance

TermInsurance
Advantages Disadvantages
Pureinsurance Nosumassured

Lowcommission,hencelower

premiums

WholeLifeInsurance
Advantages Disadvantages
Insuranceaswellascash Higherpremiumsduetodual
benefitsuponsurrender functionality

Cashbenefitsare Higheragentcommissions
accumulatedbasedonthe
returnsinvestedinthefunds
managedbytheinsurance
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Temporaryinsurance
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CENTRAL PROVIDENT FUND (HTTP://INVESTMENTSTAB.BLOGSPOT.SG/P/CENTRAL-
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Usedtoensuredisciplinefor
savings

Search
Investmentlinkedpolicies
Advantages Disadvantages
Insuranceprotectionduration Limitedinsuranceprotection
maybespecifiedbycustomer

Investmentandprotection Temporaryinsurance
function protection

Investsinexternalunittrusts

References
www.diyinsurance.com.sg
http://www.investopedia.com/articles/pf/06/insureneeds.asp
http://www.forbes.com/sites/lawrencelight/2013/04/29/howmuchlifeinsurancedoineed/

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