Understand the ins and outs of insurance to avoid losses

Insurance is a subject that many of us do not fully grasp, no thanks to the overuse of baffling jargon and incomprehensible legalese in policy documents. But this should not detract from our responsibility as consumers to try to understand how something so important actually works. After all, if you rely solely on the person selling you the insurance product and do not know how to ask the right questions, the consequences can be dire. It is particularly important to know the ins and outs when you decide to prematurely terminate a policy or are considering switching from one policy to another. The Sunday Times highlights three real-life scenarios, including one where a policyholder paid a high price for a poor decision.

Real-life case 1: Upgrading the Integrated Shield plan 

Mr Low Guan Teck (not his real name) received a request from his insurer to upgrade his Integrated Shield plan from basic to a higher one that covers private hospitalisation.

He applied for the higher plan for himself and his wife. The couple are in their 70s.

Mr Low's upgrade was rejected owing to a pre-existing condition but his wife was accepted subject to a medical examination. Mrs Low went to a general practitioner and submitted a medical report. The insurer applied the exclusion of "Disorder of the Heart and Blood Vessels" on the policy.

Mr Low signed an acceptance of the exclusion which he later claimed that he did not understand. It turned out that the couple are Chinese-educated and are unfamiliar with insurance practices.

Two years later, Mrs Low was admitted to Mt Elizabeth Hospital with chest pains. She was under intensive care for three months. At the end of her stay, the hospital bill amounted to about $675,000.

The insurer rejected the bulk of the claim due to the exclusion. The case was submitted for arbitration and it dragged on for two years. The final decision of the arbitrator was in favour of the insurer.

The couple had bought these plans at different times from various sources and had not informed each adviser about what else they had in their insurance portfolio. This made it difficult for any one adviser to grasp the big picture and identify the gaps and give good recommendations.

Mr Low had to pay the cost of the arbitration and the legal fees for both sides, amounting to $263,000.

This effectively means a mind-boggling total cost of $938,000 for the Lows.

But only about $130,000 was covered by the MediShield Life portion (which covers pre-existing illnesses) of Mrs Low's Integrated Shield plan, which Income paid.

Real-life case 2: Replacing the Integrated Shield plan

For many years, Mr Howard Lee (not his real name) was insured under Company A's Integrated Shield plan for private hospital coverage.

He consulted a doctor one day for a tummy ache. His doctor suspected it to be gastric pain and did not recommend any follow-up.

A few months later, Mr Lee was approached at a roadshow by an adviser from insurance Company B. The adviser sold him Company B's Integrated Shield plan.

Mr Lee, 50, was unaware that this would result in the direct replacement of his Shield plan from Company A. He bought Company B's Integrated Shield plan without much thought.

Shortly after the plan was purchased, the stomach pain turned out to be stage three stomach cancer.

As the condition was pre-existing and it was not declared during the application stage, Company B could not cover his hospital cost entirely.

Company A was also unable to cover his cost as the plan had been replaced by Company B's plan.

Fortunately for Mr Lee, his employer's group health insurance covered his hospitalisation, which came to $100,000.

Mr Dennis Hoe, insurance planner at DIYInsurance, advises consumers to note that each individual is allowed only one Integrated Shield plan.

In this case, Mr Lee mistakenly thought that Company B's plan would offer him additional coverage to his plan with Company A.

"We usually do not recommend consumers to switch/replace their Integrated Shield plans if they have any pre-existing conditions, or if they are in the midst of seeking consultation/treatment for a medical condition," said Mr Hoe.

Real-life case 3: Reviewing insurance needs 

Mr and Mrs Mark Tan (not their real names) are in their 30s with two children, aged two and four.

They approached SingCapital for financial planning. As part of the analysis, SingCapital reviewed their insurance needs and policies.

The couple had bought five policies from different insurers and were spending around 15 per cent of their annual salaries on premiums.

As a young family, they have high protection needs. However, all their policies were endowment ones with little death coverage. There was also no critical illness cover.

The couple's rationale was that they were saving through endowment policies, which provided some death coverage.

However, they had bought these plans at different times from various sources and had not informed each adviser about what else they had in their insurance portfolio. This made it difficult for any one adviser to grasp the big picture and identify the gaps and give good recommendations.

As their younger child frequently falls sick, Mrs Tan decided to quit her job to be a full-time mother so the family became solely reliant on Mr Tan's salary. This resulted in the couple having difficulties keeping up with the insurance premiums.

After reviewing their policies, SingCapital recommended the following:

• Adjust their budget for insurance needs according to their current income.

• Establish and prioritise their financial goals.

• Prioritise their policies to cover medical coverage, higher death cover, total and permanent disability, critical illness coverage, children's education and retirement.

• Recommend the necessary insurance policies according to their "new" budget.

SingCapital chief executive Alfred Chia, said: "The couple terminated three endowment plans so as to reallocate the budget to the policies with high protection elements.

"While they suffer some financial losses due to the premature termination, they were glad that through comprehensive financial planning, they now have the right type of insurance coverage according to their budget."

A version of this article appeared in the print edition of The Sunday Times on December 17, 2017, with the headline 'Understand the ins and outs of insurance to avoid losses'. Print Edition | Subscribe