Apart from short-term insurance plans like certain endowment policies that mature in three to five years, insurance is typically regarded as a long-term purchase.
The Life Insurance Association Singapore (LIA) says products are designed to meet our financial needs and goals as we journey through the different stages of life.
"With limited financial resources, we need to think about what is most important and which type of insurance comes first," it adds.
Whether we are young or older, we will need medical services from time to time, so health insurance is a foremost basic need.
If you have the budget, buy a critical illness cover. It will pay a lump sum that will go a long way in helping you cope with expenses during a period of recovery from serious illness.
A disability income cover helps working adults tide over the months that you are unable to work. And if you have dependants such as parents, spouses and children, providing for them in the case of premature death is a fundamental need.
There are also plans that help you save in a disciplined way for large-ticket items such as children's higher education, while investment-focused products help you grow your savingsor accumulate funds for retirement.
Mr Ian Martin, chief executive at HSBC Insurance (Singapore), notes that one objective of insurance is to provide income replacement in adverse and unforeseen circumstances such as death, hospitalisation, critical illness or disability.
"Under such circumstances, it is important that the affected person, especially if he is the sole breadwinner, is able to continue generating income that covers day-to-day household living expenses, including his children's education, throughout his working years," he adds.
"Debts such as mortgages, car loans and credit cards can be paid off without burdening the family. For example, a 40-year-old needs to be able to provide for a minimum 25 years of income replacement (assuming that he wants to retire at age 65) should any unforeseen adversity occur," he said.
Mr Daniel Lum, Aviva Singapore's director of product and marketing, says insurance plans that are designed for wealth accumulation need time to capitalise on the power of compound interest for your money to grow.
LIA's advice is to consult a financial adviser to identify your financial needs and goals before making a purchase. This will also help you understand the policy terms and benefits and be confident that you can afford the premiums over many years.
BEFORE BUYING AN INSURANCE PLAN
Mr Andrew Yeo, general manager for life and health insurance at NTUC Income, says you should first assess your needs and the amount of protection required.
"Work out a budget to ensure that the premiums are affordable throughout the policy term," he notes.
"Review your existing policies as you move on to the different stages in life to ensure sufficient coverage. Look out for any exclusions or loadings offered by the insurer due to one's health or other factors."
Furthermore, you should consider buying insurance such as protection plans while young. Mr Yeo says this is because you are less likely to have certain medical conditions then, which means that you will be insurable.
"Generally, insurance coverage charges increase as you grow older, as the risk of death, disability and illness increases with age. In other words, for the same sum assured, someone who is older may have to pay a higher monthly premium," adds Mr Yeo.
As financial goals take time to realise, the earlier you buy insurance, the more time the policies have to grow in value.
"If you have a specific financial goal that you want to achieve, consider taking up a plan that matures just before you will need that sum of money," says Mr Yeo.
"For example, if you just had a baby, you can anticipate that you'll be needing a substantial amount to send him or her off to university in 20 to 25 years' time.
"You can start by setting aside a small amount every month that goes towards your savings plan. You can gradually increase this amount as your earning power increases."
TERMINATING OR SWITCHING YOUR INSURANCE PLAN
MoneySense - the national financial education programme - says that buying an insurance policy is a long-term commitment. Any decision to replace a policy should be taken only after careful consideration. It is also important to note the impact that terminating or amending your policy can have on your insurance coverage.
Terminating a policy prematurely may result in a financial loss as typically, the surrender value (cash value you receive for early termination) may be lower than the total premiums paid.
MoneySense warns that in the case of a whole-life policy, the surrender value is usually zero in the first three years, or some proportion of the premiums paid in the later years.
And note that in some cases, additional fees and charges may be incurred.
Ms Michelle Ee, director of wealth management at Financial Alliance, says insurance plans with saving or investment elements have lock-in periods where you will incur a loss if you terminate or surrender the policy before that period ends.
Mr Brandon Lam, Singapore head of financial planning group at DBS Bank, says the policyholder risks not being able to obtain a similar level of protection on the same terms in future due to changes in age or health.
He advises policyholders to consider carefully before terminating a policy prematurely.
"Upon terminating the policy, the policyholder would lose all the benefits covered under the insurance contract and might not be able to get the same level of premium or protection should he decide to take up a new plan in future," he notes.
Mr Martin adds that you should consider terminating a policy prematurely only when there is a change in financial circumstances, when the original plan no longer meets your needs.
For example, if a person retires after selling a business he has worked over his lifetime to build, he would likely have sufficient financial resources to "self-insure". In retirement, the need for income replacement may no longer be relevant, especially if his children are all grown up and able to support themselves.
"An insured person can consider switching, especially if he feels that the cost or the benefits of his existing plans compare poorly against current market offerings," says Mr Martin.
"For example, a person who has a whole-life policy may opt to buy a term policy where the cost is significantly lower for the same or higher amount of coverage."
He adds that risk appetite may also factor into the equation. For example, a person who bought an investment-linked policy to grow his wealth and meet his protection needs may want to switch out, given market volatility.
Another example is where a term policy was bought specifically to provide a financial safety net for the insured person's children. When the children have grown up and are no longer financially reliant on the policy, cancelling the plan may become a consideration, says Aviva's Mr Lum.
Mr Alfred Chia, chief executive of SingCapital, says: "We would recommend policyholders to consider terminating their 'redundant' policy and switch to a suitable one for the following reasons - the plan does not meet your needs, inability to pay premiums due to pay reduction or retrenchment, and an over-commitment on premium payment which is not sustainable."
LIA says the three most common situations surrounding terminations are when a person cannot afford the premiums, when they decide they no longer need the policy and when they choose to reinvest their money elsewhere.
WHAT TO LOOK OUT FOR
Insurance experts point out that if a policyholder wants to terminate his policy due to financial woes, he can consider other options such as policy loans to free up emergency cash, premium reductions or premium holidays, which extend coverage without any more future premium payments.
AIA Singapore's chief marketing officer Ho Lee Yen says: "If a policy has acquired cash value, the policyholder may choose to either apply for a loan to meet short-term financial needs or convert to a reduced or paid-up extended-term insurance policy."
Before you decide to switch your plan, assess if there are benefits for doing so and if the new policy still meets your needs.
"This is because you may be asked to pay an additional premium or be excluded from certain health conditions, particularly if you are switching the policy at an older age, or when your health condition has changed," adds DBS' Mr Lam.
Mr Dennis Hoe, insurance planner at DIYInsurance, warns there is a chance that the new insurer may offer an unfavourable underwriting result or decline cover due to a pre-existing medical condition.
"Even if the customer is not aware that he has a pre-existing condition, the new insurer may also decline the claim if the condition occurs before the application date," notes Mr Hoe.
So make sure you do not have any pre-existing condition when switching to another insurer.
Other factors will include checking if the new insurer offers higher coverage and benefits at a more competitive premium and that there is no financial net loss during the replacement.
Mr Paul Wilson, Prudential Singapore's head of product management and development, says you should consider your current and historical health records before making a decision to terminate or switch a medical insurance plan.
"Even past claims for minor ailments should not be ignored, as they would be taken into consideration by the new insurer," he adds.
An AXA spokesman says it is "not advisable" to switch health plans unless customers are in the absolute pink of health with no prior claims submitted.
In fact, Ms Ee says her firm does not advise terminating a hospitalisation policy such as the Integrated Shield Plan.
"If premium payment is a problem, we recommend downgrading to a lower coverage plan with the same insurer so that there is no change in the terms of coverage.
"We do not recommend switching insurer as there is a big risk of being excluded for pre-existing conditions which we may or may not be aware of," she adds, referring to an Integrated Shield plan.
This is because "the biggest risk" is loss of coverage for conditions which otherwise would be covered under an existing plan. Other consequences or risk include loss of savings, poorer coverage terms and higher premiums.
Note that the termination of an existing plan should be done only after the new policy is out of any applicable "waiting period" (during which cover may be declined), says Ms Ee.
An Integrated Shield Plan has a MediShield Life component which covers pre-existing conditions. MoneySense advises that when you switch from one Integrated Shield Plan to another under a different insurer, you may be covered for pre-existing conditions only up to MediShield Life benefits.
This is because if you have existing medical conditions that are covered by your previous Integrated Shield Plan, you may lose coverage for these conditions under the additional private insurance component of your new Integrated Shield Plan, says MoneySense.
10 KEY QUESTIONS BEFORE YOU SWITCH
1. Can you get the same cover for a lower premium or
better coverage with the same premium?
2. Are the additional benefits justified by any
additional fees or charges that you may incur?
3. Are you still insurable and able to get the same or
better underwriting outcomes?
4. Does the existing policy still serve your financial
5. Does the new policy better serve your financial
objectives and needs?
6. Will you incur a loss if you terminate prematurely?
7. Will the existing policy provide better value since it
has already accumulated a cash value?
8. Is the premium for the new plan affordable?
9. If you are advised to replace your current policy
with a new one, do you understand why?
10. Will your new policy be in force before you cancel
the previous one?