Throughout my financial advisory journey, I have come across many different opinions about insurance. Even the professionals have differing viewpoints and are constantly debating about it.
Here are the 5 most common debates that I have encountered. Allow me to share my take on each issue.
1. Term Insurance vs Life Insurance
When it comes to insurance, this is elephant in the room. Is life insurance really unnecessary or even harmful? Does the adage ‘buy term and invest the rest’ really hold water?
Taken in a holistic sense, Insurance is a temporary need. Many argue that one does not need life protection when one has no dependents or when one is retired. Coverage for term plans stops at a predetermined date and hence it achieves this outcome.
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Term insurance is a pure protection plan without any cash value. In general, term insurance is cheaper compared to life insurance.
Another school of thought states that one will still need protection even though one has no dependents or upon retirement. For example, in the event of critical illness, one might still need to seek alternative medical treatment. This lump sum of cash can be accounted for by the critical illness payout from life insurance.
For those who are not investment savvy and have no discipline to save, life insurance can assist in building an egg nest for the later years.
My personal opinion
While I advocate a ‘buy a term and invest the rest’ approach, I also agree that there is still a need for basic protection for life.
In the current market, there are hybrid term-life plans. This type of plan provide basic coverage for life and a multiplier on the basic coverage until a certain age. This will serve the purpose of having higher coverage during our prime years and basic coverage for life time. If you add in CI or early CI as a rider, the plan may be more affordable as compared to a term plan.
For more about life insurance vs term insurance, please read “Life vs Term Insurance – Which is the better choice for you“.
2. Endowment vs Investment for child education
An Endowment policy can provide a guaranteed payout. With an endowment plan, if something were to happen to me, the insurance company will pay for my child’s education. For someone who does not know how to invest, an endowment policy is one way to grow my savings.
Investing in the market can provide better returns. Education inflation is too high and returns from sound investments is the only way to outperform the inflation. With the proliferation of Exchange traded fund (ETF), there is really no excuse for anyone not to invest.
My personal opinion
When it comes to investment returns, there are always two factors to consider – risk and return.
Investing directly in the market will result in higher returns but may also carry a higher risk. What if you invest for 2 years and then something happen to you? You will have no more earnings and no more free cash for investment. How then do you ensure that you will still be able to accumulate sufficient savings for your child education?
What if the stock market crashes at the year when your child needs to go to university? Are you able to liquidate your investment to pay for your child education there and then?
I always propose a balanced approach. One should consider getting a basic endowment plan and also invest directly in the market to get higher returns. This should give better return in totality and also provide a certain payout if a catastrophic event should happen.
Do take note that you should know how much is your real return for your endowment plan. To learn more, you can read “Everything you need to know about Endowment Plans“.
3. DIY vs Financial Advisor
Buying insurance is getting a lot easier. Now there are many insurance comparison websites whereby you can use to get the cheapest insurance. You will also save on the cost of purchase as some of them offer commission rebates like DIY insurance and CompareFirst.
Many look at financial advisors with inherent distrust as they are known to push products with the highest commissions.
The truth is – Insurance is a contextualised product. One cannot buy based on the lowest premium alone. A competent advisor can help you identify underlying protection benefits and get the best coverage based on your needs. There is no perfect comparison as each insurance plan has its own unique features. No comparison site can give you the full comparison.
My Personal Opinion
If you are financially savvy, go ahead to DIY your own insurance coverage. This will reduce the cost of your purchase. No questions about that.
However, buying insurance is not like buying shampoo. The benefit of the product is more important than the price. Insurance is the one of those purchases that you will carry for your entire life time, so make sure you get the right one and leave that worry behind.
While there are some advisors who put their own interest ahead of their clients, most are ethical and want the best for their clients. It is not fair to tar all with the same brush.
4. Company Insurance vs Personal Insurance
I have come across many who insist that they have a good employer who can cover all medical expenses. In the event of critical illness, the employer will even payout a lump sum of money based on a certain multiplier on the last drawn salary. It is a comforting situation and hence many are reluctant to purchase additional insurance.
There is often a claim limit on company coverage. Company insurance will only protect when the person remains working with the company and the coverage will be lost the moment he or she leaves the company or upon retirement.
My Personal Opinion
Not all the companies provide the same insurance. Certain coverage applies only if the illness or injury is work related. There are also some companies that provide “as charged” coverage. Some might even allow you to carry the insurance with you even when you leave the company.
My suggestion is always to check your company’s coverage. Based on my experience, most of the company insurance coverage will cease when you leave the company. This means that you will lose your coverage upon retirement or upon resignation.
You should always get your own insurance. Insurance is a personal need, you should make sure you are well covered no matter what your employment status is.
5. Private Ward Hospitalisation Plan vs Restructured Ward Hospitalisation Plan
Private Ward Hospitalisation Plan
Everyone wants to get the best treatment in the event of hospitalisation. Everyone wants to skip the queue and get immediate treatment. Nobody wants to worry about hospital charges and money when they are hospitalized. Such is the argument for private plans.
Restructured Ward Hospitalisation Plan
Yet, private ward hospitalisation plans are expensive. Many, especially the young and healthy, would want to save on the premium.
Some argue that restructured hospitals have better medical instrument and better medication because of government funding. The follow up cost is also cheaper.
My Personal Opinion
To me, hospitalisation insurance is the top priority. I will always encourage you to get private ward hospitalisation plan. It is the most commonly claimed insurance. If you want to save on the premium, my suggestion would be to reduce other types of insurance.
Also, in the event of hospitalisation, I am sure you will want to get immediate treatment instead of getting an appointment in few months time due to unavailability of room or doctor.
Moreover, if you are really concerned about premium increase when you are older, you can have the option of downgrading your coverage without any medical underwriting. On the other hand, if you decide to upgrade your coverage, it will be subjected to medical underwriting and your application may be rejected if you have developed medical conditions along the way.
Do take note that all of the above is purely based on my personal opinion. You should seek for professional advice from your financial advisor.
Beyond insurance, there are many other debates in investing and CPF related products. It is important that your financial advisor shares the same belief as you so that he or she will recommend suitable products for you. I simplify these debates for you and give you the ability to understand any product in the market in just 4 hours at my Personal Finance Mastery Course.