young and savvy

The big 'I' question: What sort of insurance to buy for your child?

-- ST ILLUSTRATION: ADAM LEE  
-- ST ILLUSTRATION: ADAM LEE  

Insurance becomes an important consideration when there's a new addition to the family

American director and actor Woody Allen once said in his 1975 comedy Love and Death: "There are some things worse than death. Have you ever spent an evening with an insurance salesman?"

While the sentiment is rather harsh, in the past year or so that I have become well acquainted with several insurance agents, I began to understand where Woody was coming from.

Not that there's anything wrong with the agents, but buying insurance can be a mystifying process, especially since such products have become more complex and highly customised over the years to cater for individual age and gender groups, and objectives.

Every time I started a conversation about insurance, I would get a headache. And I procrastinated for as long as possible.

This all changed when I discovered I was pregnant.

Overnight, it made sense to think about what I was covered for since I was soon to be responsible for a little life. I soon learnt that there are very few insurance policies that cover an already-pregnant woman. Some policies require you to buy it a few months before getting pregnant - which does not work if the baby happened earlier than expected or was a surprise.

Over the course of many conversations with agents, I was introduced to a hybrid form of insurance that provided some level of medical coverage for pregnancy, which paid out upon death of the mother, certain pregnancy complications and congenital illnesses in the child, combined with an investment-linked insurance policy, also known as ILP.

ILPs are life insurance policies in which the premiums you pay fund both life insurance protection and units in an investment fund, such as unit trusts.

Prudential's PRUfirst gift and AXA's Mum's Advantage are examples of this type of insurance. For $100 a month, I was covered while I was pregnant and when my son was born, it converted into an ILP that covered his life for $100,000 while accruing a cash value from the investment portion, which I was told by the agent could be cashed out when he was older and say, needed money for university.

This sounded appealing, so I bought one such policy when I was pregnant. But the pros and cons of such a policy became clearer to me only over time.

Firstly, it was good that it offered a measure of coverage for pregnancy, but do keep in mind that the payout is not earth-shattering: $5,000 on death of the mother, or $5,000 for pregnancy complication or congenital illness. Hospital care benefit is only $100 a day and capped at a maximum of 25 days.

One other benefit is that even if your child is born with a medical condition, he is still covered under the policy's life insurance component.

Secondly, while the ILP offered an attractive coverage amount plus wealth accumulation for a reasonable premium because of my son's very young age, the life insurance component requires regular premiums for the rest of his life. The investment risk is also borne completely by the policyholder.

The one major flaw of ILPs is that mortality charges rise exponentially when the insured ages. For example, when my son, assuming he's a male non-smoker getting $100,000 coverage, reaches the age of 50, for an annual premium of $1,200, 70 per cent - or about $850 - of this is eaten up just by charges. By age 60, the mortality charges would be about $2,630 - more than the annual premium, so it would begin to eat into the cash value of the policy. Any accumulation over the years will be eroded quickly at this age.

So what else is out there?

Parents in similar situations might want to consider limited pay plans instead. This traditional life insurance plan also has increasing mortality charges, but as premiums are locked in for 20 years, this has already been priced in and policyholders do not have to worry about rising mortality charges.

So for a limited pay plan from Tokio Marine, for example, for about the same premium of about $100 a month, my son is covered for $250,000 for death, total permanent disability and critical illness. At the end of 20 years, I stop paying the premium but the life insurance continues for the rest of his life.

The projected surrender value for this policy when he reaches age 65 is $180,000 - a tidy sum considering I would have paid about $24,000 in total for this policy. This sum is made up of a mix of guaranteed and non-guaranteed returns and is, of course, dependent on the investment performance of the policy. Most insurers offer this type of insurance, some with more attractive premiums and returns than others.

Parents should also consider medical insurance to cover hospitalisation costs for their child. Basic MediShield only covers your child for certain wards in public hospitals, whereas a comprehensive shield plan would allow you to seek treatment for your child at any hospital and class of wards, with the full bill paid by the insurer. Given that the cost is not huge - I pay $230 a year for one such plan with Great Eastern for my son - this is a must for little ones for parents' peace of mind.

One more tip: Since most comprehensive MediShield plans are pretty similar, the more important factor to consider is whether your agent is dependable and is helpful when you want to make a claim.

Of course, once you tackle the big "I" question, there are other aspects of financial planning to consider, such as whether to buy endowment plans for your child's university education and policies that you, as parents, should consider now that you have a family.

Those can be tackled on another day. For now, taking that first step to think about the "I" question would be the best thing you could do to prepare for your newest family member.

stinvest@sph.com.sg

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