Life Insurance: A Safety Net For All Times
The global credit crunch and recession will have a ripple effect on most of us, and sometimes, in very different ways. At times like these, we tend to instinctively scale back on our overheads and expenses, cutting out non-essentials and re-working household and personal expenditure.
So what role does life insurance play in such times of uncertainty?
It may be that you have several life insurance policies in hand and you and your family are pretty much covered in terms of medical expenses, untimely death or disability, retirement planning and so on. Nonetheless it may be timely to review your plans and determine if there are still gaps to fill for new and foreseeable needs.
Or perhaps you dont have any insurance at all.
Thus the questions arise: Is it a good time to buy life insurance? Should I hold off till the economic climate gets better? Or when I think my job is more secure? Is life insurance just a good-to-have but not critical at this point in time?
The quick answer to some of the above questions is that anytime is a good time to buy life insurance. In good times or not so good times, you should never put off plans to protect yourself and your family from lifes untimely situations. When adversity strikes, the appropriate life insurance plan can help minimize the impact, acting as a buffer to help you, or your family as the case may be, get back on track sooner rather than later.
To help you in your decision-making when considering life insurance during these tough economic times, here are answers to questions you may have.
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If I want to buy a life insurance policy now, what would be the best kind of policy to buy?
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How safe is my life insurance policy in this financial crisis?
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I have an investment-linked policy (ILP). How will the financial crisis affect the policy value?
- I have read that the financial crisis may last through till 2010. Is this the right time to be buying an insurance policy?
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If I want to buy a life insurance policy now, what would be the best kind of policy to buy?
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How safe is my life insurance policy in this financial crisis?
- The Insurance Act requires all insurers to establish a separate insurance fund for each class of business, and to ensure that each funds assets are used only to meet the funds liabilities. These funds are separated from one another and the Head Office of the insurer.
- Each insurance fund must have more assets than liabilities, plus a safety margin. Liabilities include the estimated net future payouts to be made to policyholders. In estimating the liabilities, insurers are also required to provide a buffer for prudence.
- At the company level, each insurer must maintain a safety margin aggregated across all funds that exceeds the minimum requirement set by MAS.
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Many investors have lost their investments in the recent crisis. Can I lose all my investments that are linked to my life insurance policy?
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I have an investment-linked policy (ILP). How will the financial crisis affect the policy value?
- Is it safer to buy a policy from a local insurance firm?
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I'm afraid that an insurer may cease operation or go bankrupt. Is it safer for me to buy different policies from various insurers rather than dealing with one single insurer?
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What kind of policy would be the better option at this point in time par policies or ILPs? What are the differences?
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I was recently retrenched and cannot afford to pay my premiums. What happens if I fail to make required premium payments?
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I've lost confidence in all financial products. Should I play safe and terminate my life insurance policy now?
Life insurance is a cornerstone of sound long term financial planning. There is an extensive range of products which have the flexibility that allows you to tailor a plan to meet your specific needs and within your means, offering a combination of savings, protection and investment.
Health insurance protects you and your family from a financial loss as a result of an accident, illness or disability. It can provide an income while you are disabled or in hospital, or cover the cost of your medical treatment.
The appropriate life insurance plan provides the peace of mind in knowing that your dependants are protected from financial difficulties in the event of your untimely death, critical illness or physical disability.
Hence, it is always the right time to make sure you are appropriately protected with a life insurance plan.
In purchasing an insurance policy, you should give due consideration to your need for protection. However, as everyones needs and financial circumstances are different, and they change over lifes cycles, there is no rule of thumb that can tell you exactly what products to buy.
That is why you should seek advice from financial advisers who will undertake a fact-find with you to evaluate your needs and then make the appropriate recommendations. This process takes into account the amount required to cover your protection needs, replace your income, cover education funding for your children, settle outstanding liabilities such as mortgages and provide for those should the unexpected happen. Based on this analysis, your financial adviser will be able to determine the product that will best meet your needs, means and goals and at the same time, ensure that you are getting adequate insurance coverage to cover the needs of your dependants.
There are various safeguards in place to protect policyholders:
It is unlikely that a registered insurer is unable to meet its obligations if it manages its assets prudently. However, as an additional safeguard, the Insurance Act also provides for the Policy Owners Protection Fund (PPF) to compensate policyholders in the unlikely event that a registered insurer fails. Under current provisions, the PPF will cover up to 90 per cent of an insurer's liability from any life policy.
As an investor, insurers are also subject to investment risks. As such, there is no guarantee that any of their investments will not fail.
However, all insurers in Singapore have established robust and stringent risk management policies and procedures that help to mitigate and control investment risks. These policies and procedures adhere to the risk management guidelines issued by the MAS.
In addition, all insurers are required to hold more assets than liabilities as well as a safety margin for each fund to ensure that they are able to meet their obligations to policyholders.
An ILP fund pools together premiums paid by ILPs and invests in a portfolio of assets. The price of each unit in a fund depends on how the investments in that fund perform. Given the financial crisis, some funds may be under-performing compared to previous years. As such, your policy value may be lower.
However, ILPs provide you with a range of funds in which you may invest as well as the flexibility to switch between different funds. If your fund is under-performing, you should sit down with your financial adviser to review your policy and explore the various fund options that suit your financial situation and risk profile. After taking everything into consideration, you may switch to the funds of your choice. However before doing so, bear in mind that you should also consider the longer term prospects of the new fund you are switching to, the costs of switching, and whether the new fund is appropriate for your risk profile.
All insurers, both local and foreign, that are registered in Singapore are subject to the same regulatory requirements. As such, it makes no difference whether your policy is with a local or international insurer.
What matters is that you purchase a policy that best suits your needs and means. Depending on the different insurance plans offered by the insurers and your objectives, you may choose to insure with an insurer who offers the plans you need.
Different insurance companies offer different products that suit varying financial objectives. You should choose a suitable insurance product based on how well it suits your needs as buying a policy is a long term commitment.
A 'participating' fund is made up of the premiums that policyholders pay for 'participating' policies. A 'participating' policy participates in allocations made from the participating fund. The share of the profits is paid in the form of 'bonus' or 'dividend'. Bonuses or dividends are not guaranteed as they depend on how the fund's investments are performing, how many claims are made on the fund, and any expenses incurred.
A 'non-participating' fund is made up of premiums from 'non-participating' policies. A 'non-participating' policy is not entitled to any profits the fund may make but only to fulfill the obligations of non-participating policies.
An 'investment-linked' fund pools together the premiums paid by investment linked policies and invests in a portfolio of assets to achieve the fund's objective. The price of each unit in a fund depends on how the investments in that fund perform. The fund may be managed by the insurer or external fund manager(s).
Talk to your financial adviser for greater clarity on the different type of policies before deciding on what best suits your financial situation and risk profile.
You typically have a grace period of 30 or 31 days during which you can pay the premium with no interest charged. If you do not pay your premium within this grace period, and as long as your policy has sufficient cash value, the insurance company will automatically pay your overdue premium by taking a loan against the policys cash value. This keeps your policy in force but you will have to pay interest on this loan.
However, if you are unable to continue paying for premiums on your policy, you should consult your financial adviser to consider what other options are available. It may be possible to reduce the sum assured which in turn will reduce premiums.
It would not be advisable to terminate your policy prematurely. Buying a life insurance policy is a long-term commitment and is not intended as a quick-fix investment tool. Early termination may incur additional fees and charges and the surrender value may be less than total premiums paid. More significantly, you and your family will no longer be protected should the unexpected or worst happen.
It is worth repeating that life insurance provides the peace of mind in knowing that your dependants are protected from financial difficulties in the event of your untimely death, critical illness or physical disability. In this economic climate, protection becomes even more important than ever.