Many people know that life insurance is important. Depending on your insurance coverage, the payout can help to cover medical bills or provide working income relief if you’re severely hospitalised and unable to work.
Despite its importance, insurance is often neglected because it’s only useful in a hypothetical situation and some people prefer not to think about the unknown. Also, the many jargons and the wide variety of add-ons makes life insurance a difficult topic for many.
To make things worse, there are financial agents who sell products that are good for their commissions but may not be very relevant to their clients. It’s no wonder then that people will naturally form beliefs about life insurance, some of which are not true. Here are several common (mis)beliefs about life insurance.
1. People prefer to have cash savings than to pay for insurance
Some people believe that if you set aside the money meant to pay for life insurance premiums, the savings of tens of thousands of dollars over the years would suffice to cover the medical bills. While there’s nothing wrong with the concept of saving, it might be dangerous to assume that whatever you have saved will be enough to pay for your emergency medical bills.
That’s to say, many people underestimate the costs of medicine, hospitalisation, and inability to work. While a small incident like appendicitis or food poisoning can likely be paid off with your savings, what if it’s as severe as cancer or a physical disability that impacts your ability to work? The payout from life insurance can cover for major incidents, including death, for which the payout will go to your dependents.
Yes, it’s important to build savings and to keep a tight reign on your finances but an unexpected emergency is something that you cannot account for. Rather than think of potential savings when you skip on insurance premiums, it might be more useful to think about how the insurance plan protects you and your family.
Assuming a certain lifestyle and your current commitments, the purpose of an insurance policy is to minimise the impact of such incidents. The insurance payouts can then help with the livelihood of yourself and your dependents.
Savings are important, but insurance is equally if not more important if you do not want emergency medical expenses to affect your savings and finances.
2. People perceive premium payment as a loss of money rather than a gain of insurance coverage
One of the concerns regarding insurance is that your paid premiums will go to waste if nothing happens to you. It’s as though you’re paying for an imaginary situation. However, what most people fail to account is that they are actually protecting the lifestyles of themselves and their families.
When you buy a term life insurance, it’s true that you’ll not get any value when you terminate the policy; you’re only paying for the ongoing coverage. But then, there’s the option of a whole life insurance plan, which gives you coverage and comes with a cash value when you surrender the policy. This cash value can even appreciate in value, especially if you start the life insurance plan early.
When people see it as a loss of money, they may just buy the most basic of insurance plans – it could be a $50,000 life coverage, or maybe a basic hospitalisation plan with a rider. They may feel that some coverage is good enough and that there’s no need to pay for a more comprehensive coverage.
That may be true for some individuals, but once again, it depends on your life commitments and who you’re responsible for. For example, if you have elderlies and children in your family and you’re the sole breadwinner, there will be more dire consequences if something happens to you. These are the times when you should consider increasing your life coverage.
Besides getting the most basic coverage, put some thought into what the insurance coverage is meant for and how the added coverage can benefit yourself and your dependents.
3. People expect family or government to support them when needed
Singapore has a robust healthcare system, and some Singaporeans may thus take it for granted that everything will be provided for them.
For example, our monthly contributions to the CPF (Central Provident Fund) and MediSave are meant to help support ourselves financially and with our medical bills in the long run. Then, there’s also MediShield Life, which is a government-initiated basic health insurance plan for all Singaporeans and PRs.
With so many fail-safes to fall back on, surely nothing can go wrong?
Unfortunately, it’s this complacency that may prove to be costly. Just like how the most basic of insurance coverage is good to cover for smaller medical bills, you should never assume that the basic coverage is enough.
Furthermore, the different policies and coverage would mean different co-pay amounts and excesses. Co-paying means that you’ll have to fork out a sum alongside the insurers for your medical bills, while excesses are a minimum amount you’ll need to pay before the insurers pay the rest of the bill. These are important factors when choosing your life insurance and hospitalisation plans.
Also, insurance is not just meant to protect against unexpected incidents; it can also be part of your retirement planning. Picture someone who depends solely on his CPF for retirement – assuming he manages to hit the Basic Retirement Sum at age 55, he’ll be able to start withdrawing $730 – $790 a month when he hits age 65. Source: CPF Board, 2019.
You may have plans to travel or to live a certain lifestyle when you retire and the monthly payout from your CPF may not be sufficient. That’s why it’s important to build your own savings whether it is through a savings account, your own investments, or through an integrated savings plan. Premiums for an integrated savings plan will go towards insurance coverage and savings at the same time, and you’ll have a fund to withdraw from either on a regular payout or a lump-sum basis at a retirement age that you set for yourself.
Rather than depend on the government or family, it’s important to plan ahead and get a life insurance plan that can support your current livelihood and future retirement plans.
4. People perceive themselves as financially savvy
You might have heard the saying, “buy term, and invest the rest”. This refers to the idea of committing to a lower monthly premium with a term plan as opposed to a whole life plan, and to designate the remainder to investments.
Term life insurance: A term plan provides insurance coverage for a specified period. The policy continues for as long as the premiums are paid, up to a specified age. The premiums are lower than a whole life insurance plan but there is no cash value when the plan ceases.
Whole life insurance: A whole life insurance plan has higher premiums but there is a cash value when the policy is surrendered. Also, it covers for the whole of life as long as the premiums are maintained, unlike the term plan that ceases at a specified age.
Financial bloggers like SGBudgetBabe advocate this methodology as they believe that you can generate better returns when you invest yourself than if you had compounded the amount with a whole life plan. The problem is that this is only half the truth. For that method to work, you have to be as financially savvy as them.
To be financially savvy means that you know how to diversify, take profits, manage your risks so that you can be profitable in the run. Otherwise, if you’re investing blindly or solely from following the advice of others, your investments might end up worse than if you were to just leave the money in a savings account.
Many people think that they can invest with some financial knowledge. The truth is that investing takes consistent time and effort. Also, good investing is boring.
If you do not have much investing knowledge, or haven’t been very successful with your past investments, do have another think about “buy term and invest the rest”. Consider saving and protecting yourself with a whole life plan or an integrated savings plan.
5. People are cautious of insurance because of past experience and perceptions about the industry.
Some of you may have had negative experiences with financial advisors or heard stories from other friends. It could be a financial advisor telling half-stories and selling irrelevant policies. Or an agent who disappears after closing a deal with you and you’re left stranded and struggling to claim for your medical expenses when you’re hospitalised.
The truth is that every one of us have different commitments and hence different needs for insurance types. It’s not something that you can just follow the crowd or to just get the same plans as your friends. As such, it hinges on the professionalism and integrity of each financial advisor to recommend you only what you need.
Although there are negative practices, there have also been positive examples of how insurance payouts have been able to help individuals and families manage exorbitant medical bills that they would have otherwise been unable to afford. Instead of avoiding insurance totally, it would be more useful to learn about the scope of policy coverage to find the right insurance plans for yourself.
Speak with multiple financial advisors to get a fair assessment of their recommendations. Or consider an insurance broker like LiveLife, which offers insurance plans from multiple insurers, as they might be able to tailor a suite of plans for you.
Or perhaps you can learn more starting from one of these articles:
How should insurance be prioritised?
One other thing to think about is how much of your income should you set aside for insurance? If there are so many variables, what would be considered too much or too little a coverage?
The challenge for many people is that insurance premium is an expense that competes with many other purchase decisions. When there are more immediate needs and things that can impact your life right away, how much should you set aside for insurance?
Just like how you would plan for savings and investments, insurance is an expense that should be budgeted upfront. And if the extent of protection and coverage for yourself and your dependents matters, you could even prioritise it ahead of savings and investments.
As for the portion of your budget to set aside for insurance, it depends on your commitments and how much you can set aside and still live life normally. If your finances are tight and you might have more important loans to pay off first, then you could get the most basic of term plans or at least a hospitalisation plan. Thereafter, you could increase your plans and coverage amount as and when your finances allow.
As Dawn aka SGBudgetBabe puts it, “Getting insurance is like outsourcing your biggest financial risks to a third party”. It is as important to plan for insurance as it is to plan for your savings and investments.