Common Myths About Insurance

Here are some of the common myths about insurance that I have heard over my years of consultation work with clients. Some are quite absurd. Some make you think twice. Below are 5 of them and this should help you understand life insurance better.

1. You only get the money when you die.

Some folks think that there is little purpose in buying insurance, as the proceeds will only be paid out upon one's death. This is one huge myth, often said by the ignorant.

There are various forms of insurance other than death insurance. For example, disability insurance pays out when the insured suffers from a total and permanent disability, impeding his or her ability to earn a living. Critical illness insurance pays out upon the insured being diagnosed with a life threatening disease. Hospitalization insurance pays out when the insured is hospitalized, or needs to undergo surgery.

As you can see, there are many forms of 'living benefits' that are paid to the insured during his or her lifetime, and these payouts are often as important, if not more important, as the death benefit because the living benefits will greatly help the insured in paying for the expenses, debts and bills incurred.

2. You cannot make a claim on more than one insurance policy.

Not exactly true too. This may be true for policies that pay on a reimbursement basis, the most common being hospitalization insurance policies where you are reimbursed up to your medical expenses. However if one hospitalization policy is insufficient to fully reimburse the life assured, he or she may use another hospitalization policy to cover the outstanding expenditure.

For most policies, they pay on a 'lump sum' basis, and you can make a claim in multiple policies from different companies. Examples include life insurance policies, endowment policies, critical illness policies, term insurance policies, personal accident policies and so on. In fact most policies pay on a lump sum payout so it is not correct to generalize that you cannot claim on more than one insurance policy.

3. I only need to buy insurance if I can afford it. It is not a necessity.

On the contrary, insurance is a necessity for all working adults. Why else will the government start 2 national-wide insurance schemes (the Dependents Protection Scheme and Medishield) and apply it to all CPF members?

A person's ability to work and earn an income is not permanent, and definitely should not be taken for granted. There are many risks that can reduce or even disrupt a person's future income. Insurance is a tool to manage this risk, so that in an event of premature death, disability, serious illness or other insurable risks happening, there is a lump sum of money to replace the income that may be lost.

Therefore everyone should buy sufficient insurance to protect their future income.

4. I am young/fit/healthy now, I don't need to buy insurance now. I can do so in future when my situation changes.

As a good friend of mine in the nutrition industry often says: "Having no symptoms of illness does not mean that one will not have any illness in future. Prevention is always better, and cheaper, than cure".

This is perfectly true in every sense. Often people wait until their health starts deteriorating before being initiated to buy insurance. This is an expensive mistake. Insurance is always best bought when you are in a clean bill of health, as it is the cheapest and covers the most.

Insurers perform health underwriting when one applies for an insurance policy. If the applicant is not of perfect health, they may charge an extra premium, also known as 'loading', for the same benefits. Smokers and people with high-risk occupations and pre-existing medical conditions may also be subject to loading.

Insurers may also imposed an 'exclusion', which means that certain conditions will not be covered under the policy. This means that if the policyowner suffers from an excluded condition, he/she will not receive any payout, which he/she would normally be entitled to was there no exclusion.

A 'lien', which is a reduction of certain benefits, may also be applied. It is often a reduction of benefits based on a certain percentage of the insured sum. Insurers may also impose a decreasing lien, where the benefits are lowest at the beginning of the policy, and gradually increase according to a schedule pre-determined by the insurer.

The most severe action that a company may take is to decline an insurance application. This means that the applicant's health condition is uninsurable. This may be a result of the applicant's history of contracting a serious illness, or unfavorable BMI or medical condition.

Insurance is like a parachute. It's best to buy it before you need it. If you do not have it by the time you need it, then there is no need for it anymore.

5. It is better to buy insurance from a bank than an insurance company's representative/agent.

Nowadays, 'bancassurance' is becoming commonplace in most popular banks in Singapore. But it is important to note that insurance policies sold through the banks are underwritten by an insurance company. This means that while you are face-to-face with a bank staff, they are really selling products from an insurance company. Most banks have some form of partnership with insurance companies as they may not be specialized in the field of insurance, and requires the expertise and experience of the insurance companies in this area.

So if you think that you are dealing with the bank and not an insurance company, think again.

Having a insurer's representative serving you can bring tremendous benefits. Firstly, it is convenient. The representative can meet you at a time and place of your choice. Be it your office, your home, or wherever you may be, most representatives will strive to bring their financial services to your doorstep.

Secondly, it is always better to work with someone who understands you and your life circumstances so that any planning work done will be more relevant and fruitful for you. For example, the representative may know your investment risk profile to recommend you suitable investment products; your family information so that planning for family protection and children's education can be planned more accurately; and your desired future lifestyle so that your savings and investment can fulfil your dreams. He/she may also know what your existing portfolio looks like so that you can be assured that any planning done will most likely take into consideration the big picture.

Thirdly, a good representative will proactively follow up with you, providing you timely updates as well as periodic financial reviews. They should see the client-adviser relationship as a long term business partnership, rather than a sale.

Now that the common myths about insurance are dispelled, please don't keep this a secret :)