The overall understanding of financial planning in Singapore has risen in recent years. However there's still many people who are still clueless. In the report in Sunday Times dated 31st July, a survey done in March this year among 2,032 Singaporeans age between 18 to 60, as a part of MoneySENSE national financial education programme launched in October 2003. For instance, 90 per cent of Singapore save, however, very few are well-versed on the key features of common financial products such as life insurance and unit trusts.
Well, in this article, I would like to explain and explore the basics of insurance to clear the air of many people who are clueless about how it works.
THE BASICS OF LFE INSURANCE
Life insurance is a necessity for everyone. The poor, average and rich needs it. A lot of people buy life insurance without really understand how it works. That's why we always hear that they bought the wrong product. When the basic of insurance is fully understood, it is a programme which can be 're-engineered' and not a product. In addition, one can also take control of your programme.
Two components of insurance
Insurance plans consists of 2 components > Mortality Charge(costs) and Compounded Interest/Investment(returns).
A) Mortality Charge(Costs)
This is the cost for the insurance company for taking the risk to insure lifes. This cost is actually the experience(probability) of every age group to meet with death. This is calculated by professional actuaries and is tabulated into a table called "Mortality Table". All insurance companies in Singapore uses the same mortality table.
For example(for simplicity sake) :
There are 1000 people buying a insurance plan which cost $1 and this makes a pool of money. For instance, thhe cost to insure a man is $1000. When a claim is made, $1000 will be paid with the pool of money.
B) Compounded Interest/Investment(Returns)
Another part of money will be invested by the insurance company. Profit gained would given back into the plans as bonus/dividend minus admin charges and shareholders part.
In the old days, insurance plans consist of only term protection coverage. Meaning you pay certain amount of money for certain amount of premium every year/month for a period of time. There are no returns at the end of the plan's term. Many people felt that this doesn't make sense, especially in Asia, because they get nothing back when nothing happens to them, ie death, disability and critical illness, after a huge sum of money over the term. Most people here are "pantang"(malay word for believing that bad things would happen) be it Malay, Chinese or Indian. They say, "Don't buy nothing will happen. Buy sure claim."
Therefore, insurance company came out with plans which gives their customer returns. Instead of paying $1, you pay $5 which $1 goes to the cost and $4 gives you return. So, why are there different life insurance plans such as Whole Life, Endowment, Term, Whole Life Limited Pay and etc? It's actually a variation of the different proportion of money that u put into the cost and returns. For the same amount of money, the more money you put into cost the higher protection you get and lower returns you get.
For example:
$5 >>>>>> a) $3 for cost and $2 for returns = higher protection, lower returns (Whole Life)
compare with
b) $1 for cost and $4 for returns = lower protection, higher returns (Endowment)
I hope that this short explaination gives a better understanding to you about life insurance.
Any enquiries about insurance, do contact me @ teeming@gmail.com.
No comments:
Post a Comment