Ultimate Cheat Sheet To Insurance

Since we have already established that having a solid defense is the key to financial success, we ought to start assembling our safety net at once.

However, do you ever feel like your insurance agent is speaking in Greek? Or do you have that niggling suspicion that he or she is trying to sell you things you already have?

Fret not because this ultimate cheat sheet to insurance would summarize all the different types of insurance plans available in the world in just 4 simple points.

Think it’s impossible? You have to read on to believe it!

1) Life Insurance

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So this is the standard option most of you are all familiar with. It typically has a cash value attached to it and its coverage last for entire life. Hence, they are also known as a whole life plan. These plans normally have a limited paying term.

In short…

  • You pay the premiums to the insurer
  • They promise to insure you for an agreed amount throughout your entire life
  • If you terminate the cover after the policy has broke even (usually takes about 15 – 25 years), you will get back the money you put in with some additional interest.
  • If you terminate prematurely before the policy has broke even, you might get back lesser than the amount you put in (make a loss).

Examples: Whole Life Policies, Endowments, Saving plans

Hot Tips: This is perfect for you to have if you’re in need of coverage but you’re not the type who actively investing your money. You can just take the easy way out and leave it to your insurers to do the hard work for you. Naturally, you would get lesser returns than if you invest the money yourself… but hey, you can’t always be getting the best of both worlds can you?

2) Term Insurance

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This is the option that has no cash value attached to it. As a result, it is much cheaper in price and you will have to renew it every year. It typically terminates once it reaches the end of its term, hence its namesake – term insurance. This option enables you to get high coverage with low premiums.

In short…

  • You pay the premiums to the insurer
  • They promise to insure you for an agreed amount until a certain date
  • You will not get any cash back when you terminate it.

Examples: Travel Insurance, Accident Insurance, Hospitalization Insurance, Disability Insurance, Early Stage Critical Insurance

Hot Tips: This is great for periods where you need a temporal increase in coverage, e.g. when you have children, increases liabilities, etc.

Some people also like to employ a method called ‘Buy term and invest the rest’. As a term policy is much cheaper than a life policy, some people would buy a term policy for the required amount of coverage and using the remaining money saved to invest in the market with the hope of beating the insurer’s life policy rate of return.

While this may potentially yield higher returns, it is inadvisable unless you have already learned how to invest profitably. If not, you might be better off with a typical life plan.

3) Investment Linked Plans

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Well, you know how Singaporeans are; always insisting on the best of both worlds. Some people wanted something with higher coverage than a life policy, and yet still want some form of cash value unlike the term policy.

As a result, the insurers came up with the investment-linked plan (ILP). However, there’s a catch to it – they cannot guarantee you the returns on this plan.

In short…

  • You pay the premiums to the insurer
  • They promise to insure you for an agreed amount for life
  • They take a certain amount to buy the equivalent of a term insurance on your behalf
  • They allocate a certain portion of the remaining premiums into investments funds.
  • When you terminate the plan, they will liquid the amounts invested into the funds at market rate and return it to you.
  • Hence, they cannot guarantee you the returns as it is determined by the market conditions when you terminate the plan

Examples: Any insurance plan that claims to have an investment element in it.

Hot Tips: This is a great plan if you are young and want to start an insurance plan with a certain degree of flexibility to it. As insurance charges for the younger people are much lower, a larger portion of their premiums eventually get invested into the funds.

However, a plan that acts as the jack of all trades is naturally a master of none. Some would argue that the ‘buy term and invest the rest’ setup would give you higher returns, while others insist on the safe returns a life policy would provide. This is very much depend on your preferences and priorities.

4) A Combination of any the above

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To be honest with you, every other plan available on the market is just a combination of the above plans.

Life plan with a multiplier element that expires at age 65:  Whole life plan + Term plan.
Early critical illness plan with cash value: Whole life plan + Early critical illness term.

See if you can spot the combinations the next time your agent speaks you about a new plan!

Image Credits: sakalmoney.com

Think you have come across other interesting plans?

Let us know in the comments below!

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