What to Know Before Buying an Insurance Policy

Nobody gets excited to buy insurance. We all do it for very different reasons but getting your insurance portfolio sorted is one of the key components of good financial planning. In fact, the best time to put your insurance policies in place is when you’re young and healthy! 

An insurance policy is the insurance company’s promise to pay not just if something bad were to happen but also to provide for your financial security later in life.  The risk may be tangible (such as a car) or intangible (such as life). Making a choice when buying insurance therefore is all about your protection needs, the level of self insurance you can afford in the event of the unforeseeable, and how much you trust the insurer and insurance intermediary. 

You might have an inkling that insurance is supposed to help you when things are bad, like if you fall ill or someone dies. But insurance is first and foremost a financial product that allows you to live your life and perform your activities without worrying about how you’ll cope financially with life’s uncertainties. 

Browsing through the internet and talking to your friends, you’ve probably realised  that you can insurance almost anything or any event. 

The two main types of insurance are general insurance  (travel, car, personal accident, pet, student, etc.) and health and life insurance (life, health, critical illness, ILP, etc.) An insurance intermediary’s role is to advise you of options that suit your personal needs, help you with your insurance application, service you during the period of insurance and at renewal. 

There are three main types of intermediaries:

1. Captive insurance agents are employees of a particular insurance company, therefore they can only sell policies of that insurer.
2. Independent Insurance agents can represent only three companies and sell their policies to you.
3. Insurance brokers are not restricted to three principles, so they can access the entire market and sell multiple insurance companies' policies to you.

All agents and brokers earn a living through commissions paid by the respective insurance company against policy sales. You can choose to buy from a policy the insurer, an agent, or a broker. However, you should make sure that you’re making this choice knowledgeably.  

Insurer, Agent, or Broker?

Buying insurance directly from an insurer is possible and most insurance companies have a digital portal or call centre available to you. However, you’ll have to stay on top of your needs and proactively follow up on any changes you would need to make during the period of insurance. 

An insurance agent will offer you a personal touch during your purchase, from the period of insurance, to the time of claims and renewals. Agents spend time understanding your needs and sourcing the best options for your protection. Insurance agents may be incentivised to sell one insurers policies over another. Agents are particularly useful in the life and health segment to provide you with advice. 

Brokers and digital brokers on the other hand have consumer needs as a key driver for their business. Brokers can provide you with multiple options in the market, empower you to make the best choice for yourself and have less incentive to push one insurer's products over another. Digital brokers are particularly well placed to provide information in the GI space. 

Ultimately, insurance should be bought, not sold. Policy contracts can be difficult to read. But spend time understanding the contract you’re signing. If you’re not clear,  seek advice from an agent or one of the multiple online sources available. Take into consideration the benefits, exclusions and trade-offs especially when choosing lesser cover at low prices.

_“Selling on fear or price is the easy way out. It’s up to you to change your buying experience and make it a conversation about value. Demand the very best your money can buy. After all you are seeking protection for yourself and your loved ones.” _  

Common Traps

General insurance is often a grudging purchase because some of it is mandated by law. This is probably why most of us don’t pay as much attention when buying a policy which is necessary to meet our needs. Be it travel, home, or car, there are so many options and variables, exclusions and conditions that can lead to confusion. Below are a few traps you can avoid:

• Underinsurance

Under-insuring is the wrong way to keep premiums low. For example, if your home and belongings are insured for less than the replacement value, you will not be fully compensated when you have a claim. There are better ways to save on premiums. Most often, you can select a higher excess to lower premiums or buy other policies from the same insurer.

• Exclusions

Items you may expect to be covered may in fact be excluded. Read your policy carefully to identify exclusions when buying or renewing your policy. Ask your insurer, agent, or broker to help you understand the exclusions. Most online platforms also have a policy summary that will help you understand what you are covered for.

• Buying inadequate cover

Using travel insurance as an example there are material differences in the level of cover provided depending on the policy you buy. As an example, for lost luggage there might be a cap on the number of pieces and value per piece. Ensure the cover is adequate for the value you want to insure.

Let’s now look at two specific types of insurance and considerations when you want to make a purchase. 

As a starting point try and cover as much of the risk as you can. Once you’re comfortable that you’ve covered your potential financial loss, look at ways to reduce cost by making trade-offs in the level of cover you want to purchase. 

Policies are not a perfect fit for everybody, if you have a specific item you want to cover, there will be specific policies made for you. For instance, not all travel policies cover adventure sports, but some have this as a specific inclusion.

This means that you must do your research or find an intermediary that can help you identify the best available cover for your needs and the trade offs.

Car Insurance

Pick a reputable insurer. The internet is a valuable source of information and numerous sites have comments and ratings from consumers on policies they’ve purchased as well as the service they’ve received when submitting a claim. In Singapore, the MAS runs a tight ship in regulating insurers and intermediaries , so generally you will be safe buying from any insurer here.

Review your coverage. Car insurance in Singapore is mandatory but the coverage differs depending on what policy you buy. Some key things to look out for:

• Excess. Can you afford the excess payment? You can adjust the level of excess you want to pay.
• Personal accident cover. Make sure you select a policy that gives you a level of cover you need.
• Medical expenses. Select this based on what medical cover you already have as part of other types of insurance.
• Daily transport allowances. If you need to get to work every day make sure this is covered.

These are just a couple of examples and most online policy summaries will help you do this. If you need more information reach out to an agent or a broker.

Your next step is to check your options for repairs. If you are driving a new car, you may want to go to your dealer workshop for repairs. As your car ages, you may be comfortable sending your car to the insurer’s authorised workshop for repairs.

Getting the best value for your money:

• Do an annual premium check. Your insurance intermediary or online comparison tools can help you get the best deal at renewal.

• Take advantage of discounts. Discounts are available for drivers considered to be low risk (older, married and/or long safe driving record) or those who take driver training courses.

• Bundling your car insurance with home, pet, personal accident, etc. is another option to consider.

Life Insurance

Deciding on how much life cover you need is always a difficult decision. There is no magic formula that will calculate this for you. Most FA’s will have a financial model that will help you with this and there are several online tools you can use. Make sure that you apply common sense and don’t buy more cover than required. Buying a life insurance policy is not only important now but key for future financial planning. Past trends have shown that life insurance is often the first item people stop paying for. If you buy a policy that’s affordable, you’ll be much more likely to be able to hold onto it, if you have to make serious cuts to your budget.

Most policies will require you to go through a medical assessment and this is standard practice so do not be deterred by this process. This ensures that there are no surprises in the unfortunate case of a future claim. Be sure to do your research or speak to a knowledgeable trusted intermediary. Insurers range widely on how they price for factors including diabetes, smoking, travel or your family’s medical history.

If you’re looking to buy term life insurance, beware of policies that don’t allow you to convert your term life into a permanent policy such as universal life or whole life without proving that you’re still healthy. For example, if you buy a 20 year term life and after 19 years decide that you still need coverage but have developed some medical conditions since your initial purchase, the conversion feature would allow you to keep your coverage. Whereas you may not be able to qualify if you were to go back out to the market for a new policy.

There are more ways than ever to use life insurance while you’re living. For example, many newer policies give you the option to receive payments if you develop a chronic condition or need to be placed in a care facility.

Getting the best value for your money:

• Compare the costs of term and whole life insurance before you buy. Sometimes whole life insurance could cost you more for the same level of cover as a term life policy. In this case, you may discover that you’re better off buying term life with a conversion feature and saving the difference yourself.

• Get several quotes online. Applying for life insurance online or with a broker that sells multiple policies is better than visiting a life insurance agent that works with a single insurance company. Ideally you’ll want to get several quotes to compare coverage and affordability.

• Don’t buy way more cover than you need. Buying the right amount of life insurance and not too much is one way to keep your costs manageable. A good life insurance calculator can help you figure out how much coverage you’ll need.

• Buy now. Don’t put off your life insurance policy for another year or even another week. The rates you’ll pay for coverage will go up every year, no matter what. The sooner you buy, the better chance you have at affording the level of cover you need.

1. Get Your Finances in Order

Insurance is ultimately a financial tool. Be disciplined with your finances to make sure you are able to afford the policies that are best suited for your needs. Use the tips outlined in Chapter 1 to keep yourself on track financially. 

2. Avoid Common Pitfalls

Before you purchase an insurance policy, make sure you’ve understood all of the exclusions and details about coverage. Otherwise, you could end up paying large sums for unexpected expenses that may have “slipped through the cracks” of your policy. 

3. Know Your Options

Insurance should be bought, not sold. Don’t buy insurance out of fear. Instead, do your research online, compare various insurers, and get a good view of what is out there. That way, you’ll be able to buy insurance for the value it adds, not blind fear.