Moneytalk: Insurance

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Sunday, March 14

Definition of Critical Illness

Posted by Kay at Sunday, March 14, 2010 6 comments

Critical illness plans are insurance policies which will pay out a sum of money if the policyholder is diagnosed as having a critical illness. However, if you are having such a plan, have you ever seen the definition of the critical illnesses which must be met first before the full sum of money will be given out to you ? I managed to find the definition of the critical illnesses on the website of the Life Insurance Association of Singapore here and we can take a look at some of the definitions.

1 Major Cancers
A malignant tumour characterised by the uncontrolled growth and spread of malignant cells with invasion and destruction of normal tissue. This diagnosis must be supported by histological evidence of malignancy and confirmed by an oncologist or pathologist.

The following are excluded:
• Tumours showing the malignant changes of carcinoma-in-situ and tumours which are histologically described as pre-malignant or non-invasive, including, but not limited to: Carcinoma-in-Situ of the Breasts, Cervical Dysplasia CIN-1, CIN-2 and CIN-3;
• Hyperkeratoses, basal cell and squamous skin cancers, and melanomas of less than 1.5mm Breslow thickness, or less than Clark Level 3, unless there is evidence of metastases;
• Prostate cancers histologically described as TNM Classification T1a or T1b or Prostate cancers of another equivalent or lesser classification, T1N0M0 Papillary micro-carcinoma of the Thyroid less than 1 cm in diameter, Papillary micro-carcinoma of the Bladder, and Chronic Lymphocytic Leukaemia less than RAI Stage 3; and
• All tumours in the presence of HIV infection.

I am not legally or medically trained so my apologies if I have failed to misunderstand any of the terms clearly. It is stated above that Carcinoma in situ is excluded from the definition of the critical illness. A search on Google for this term reveals that it is cancer that involves only the place in which it began and that has not spread. Thus, if you have cancer which have not spread, do not be surprised if you cannot receive any payout from your critical illness plans.

14 Major Burns
Third degree (full thickness of the skin) burns covering at least 20% of the surface of the Life Assured’s body.

Here is another definition from the definitions of critical illnesses. Notice that the definition of major burns is defined very clearly and concisely. Thus, any major burns that does not meet the above definition may result in non-payment of the policy.

As such, you may wish to take a closer look at the critical illness riders or plan if you are buying one and ask your financial adviser for a more detailed explanation.

Tuesday, December 29

Medishield

Posted by Kay at Tuesday, December 29, 2009 1 comment

Medishield is an insurance scheme that is operated by the CPF board and this scheme is designed to prevent one from incurring huge medical expenses under certain conditions. It is designed to cover a large portion of medical bills incurred under class B2 or C wards only, in restructured or government hospitals only or selected outpatient treatment. As such, if you wish to stay in a higher class ward, you may have to incur a much larger portion of your medical bill. Furthermore, there are limits associated with the various items. Some of the details, which are taken from the CPF website, are given below.

Medishield runs on a deductible and co-payment or co-insurance system. Basically, the medical bill that is payable is divided into these two portions. Deductible is the amount which you will need to pay before Medishield will pay for your medical bill. This typically range $1,000 to $3,000 depending on the class of ward which you stay in and your age and you only pay for the full deductible once every policy year which is defined as the commencement and renewal date of your Medisheid cover.

Subsequently, you will have to pay for a portion of the remaining amount of medical bill after paying the deductible which is known as the co-payment or co-insurance. Typically, this ranges from 10% to 20% of the remaining amount of medical bill after paying off your deductible. The exact amount of the deductible and co-insurance are given in the table below, as taken from the CPF website.

So how does one get covered under the Medishield ? As taken from the CPF website, Medishield is extended automatically to eligible Singaporeans and Singapore Permanent Residents under the following situations.

(i) If their births or permanent residencies were registered after 1 December
2007;
(ii) If they are registered at national schools as at 1 May 2008, 1 May 2009, 1
May 2010, 1 May 2011, 1 May 2012, 1 May 2013 or 1 May 2014;
(iii) When they make their first CPF contribution after turning 16 years old; or
(iv) If they get married in Singapore.

Otherwise, you can apply for Medishield by logging in to your CPF account and submit an application online. This can also be done for your dependents who are below 16 years old. Do bear in mind that you will have to declare any existing and past medical conditions in submitting your application and the Medishield may not cover such conditions thus it is always important to apply when you are still healthy.

What I have done here is to give a summary of what one needs to know regarding Medishield and this is by no means, comprehensive enough. The CPF board has an excellent article regarding Medishield and its related FAQs and the link is available here.

An hospitalization and surgical plan or in short, H&S plan should be the very first insurance plan that you should buy and Medishield is a very basic type of H&S plan. There may be situations where a class B2 or C ward is not going to meet your needs adequately and you may be forced to upgrade to a higher class ward or switch to a private hospital due to reasons such as availability of better medical treatment or shortened waiting time for treatment. As such, Medishield may not much of a help as it is designed to cover a large portion of your medical bills in a class B2 or C ward only. However, there are other options available and this can includes the purchase of a Medishield-approved Integrated Shield plan which I will blog about it in the future.

Wednesday, September 9

Disability Income Insurance

Posted by Kay at Wednesday, September 09, 2009 4 comments

For the majority of us, our main source of income is from work. As such, if we are not able to perform our work due to any mishaps such as medical reasons or injuries, this can be financially devastating. Now some of you may think that since they have bought some form of insurance, the insurance company should be able to cover this. However, if you have only bought life or term insurance, you must satisfy the criteria of total and permanent disability which I have covered in an earlier post here before the insurance company will make any payout and this criteria can be very difficult to be satisfied. So what happens if you are injured and you are unable to work ? Are there any insurance plans out there in the market that can cover this gap and provide you with income for the period which you are not able to work ?

The answer is disability income insurance. Currently, only Aviva and Great Eastern have disability income plans and they are known as IdealIncome under Aviva and Paysecure under Great Eastern. Typically, these plans insure 75% of your current income. In the event that your employment income is terminated if you are unable to work due to any injuries or sickness, these plans will kick in to replace 75% of your income after a period of time following the start of any disability. This compensation from the insurance company can be continued up to your retirement age depending on the type of plan that you have bought. Furthermore, if you are unable to achieve your previous income being drawn from your work prior to disability, these plans will also supplement your income after your disability if you managed to find employment.

As such, if you are dependent on your employment income, it will be prudent to take up this type of insurance policy. In my opinion, this is the most important insurance policy one should have besides your medical plan. There are minor differences between the two plans offered by the two different insurers so it will be good to seek the advice of a qualifed financial adviser, who can advise you on which plan to choose.

The opinions expressed by the author in this article is provided for your personal information only and should not be constituted as financial advice. It is recommended by the author that one should seek the advice of a qualified financial adviser with any issues or questions regarding financial matters.

Friday, July 17

Definition of Total and Permanent Disability

Posted by Kay at Friday, July 17, 2009 2 comments

The definition of Total and Permanent Disability or TPD is generally the same with slight variations with different insurance companies. The definition below is taken from the website of NTUC Income.

Total and Permanent Disability is defined as:

i. the complete and continuous inability of the Insured at that time and at all times thereafter to engage in any business or occupation or perform any work of any kind for remuneration or profit; or

ii. Total Physical Loss.

Total Physical Loss means any one of the following:

i. the total and irrecoverable loss of sight of both eyes.

ii. the loss by complete severance or total and irrecoverable loss of use of both limbs at or above the wrist or ankle; or

iii. the total and irrecoverable loss of sight of one eye and the loss by complete severance or total and irrecoverable loss of use of one limb at or above the wrist or ankle.

Why am I bringing this up ? If you are thinking that the TPD clause in your policy will pay out a sum of money under the circumstances that you are disabled and unable to work, this may not be true. Do scrutinize the exact wordings of the definition of your policy.

If you look at the (i), it literally means that you lose your ability totally to earn any income. What about cases where you are permanently disabled but you are still able to sell tissue papers on the street or do some online administrative work from home ? You may not be able to claim under the TPD clause.

As for section (ii), notice that the physical losses that you are suffering from must be in pairs. For example, both eyes, limbs or an eye plus a limb. And if you are disabled, it may not be sufficient as the limbs must be completely severed or total and irrecoverable loss of use of limbs.

In fact, the phrase “total and permanent disability” is rather self-explanatory. Bear in mind that it is not total or permanent disability but it is total and permanent disability. A single word makes a lot of difference.

In short, it is extremely difficult to make a full claim under this TPD clause. If you still wish to preserve your income stream in the unfortunate event that you are disabled and not capable of working, take up a disability income insurance policy instead.

Thursday, July 9

Implementing a buy term, invest the rest plan

Posted by Kay at Thursday, July 09, 2009 12 comments

This post is part of a series of posts that discuss about the buying term insurance and invest the rest in detail. To access the other posts in this series, click here.

How can one implement a buy term and invest the rest plan or a BTITR plan practically ? One method will be to devise a plan that will take out part of the discipline that will be required for a BTITR plan. A Regular Savings Plan or RSP, in short, which are applicable to unit trusts would be appropriate. This involves the investment of a fixed amount of money into the unit trust periodically.

However, I would prefer to invest in an low-cost Exchange Traded Fund or ETFs in short such as the STI ETF or the DBS STI ETF 100 since their performance is likely to be superior to unit trusts. But these ETFs do not have the equivalent of a RSP thus one will need discipline to purchase these ETFs manually on SGX periodically.

One solution would be to participate in the Philips Share Builders Plan or PSBP in short. This is similar to a RSP except that you will be purchasing counters on the SGX instead. Furthermore, the minimum investment amount is only $100 monthly and this can be done through GIRO deductions. As such, this takes the hassle out of purchasing these ETFs manually and it will also help to maintain discipline in implementing such a plan since the PSBP simplifies the purchasing procedure.

Thus what one can do is to compute the amount of money for investing, which is the difference between the monthly premiums between the life insurance and a comparable term insurance. Once this is done, be ready to set aside this amount of money from your salary or any other sources of income every month. Next, you can apply for the PSBP to deduct this amount of money through GIRO for the purchase of the ETFs every month. After that, all you have to do is to continue this plan to continue to acquire more of the ETFs. Dividends that are being distributed from these ETFs should also be reinvested to acquire more of the ETFs too and this will help to compound your returns at a higher rate. Over time, the value of your investments should increase and provide coverage which can be more than the sum assured for a comparable life insurance policy once your term insurance coverage ceases.

Wednesday, June 24

Difficulties in implementing a buy term, invest the rest plan

Posted by Kay at Wednesday, June 24, 2009 2 comments

This post is part of a series of posts that discuss about the buying term insurance and invest the rest in detail. To access the other posts in this series, click here.

In my previous post, it was suggested that a buy term insurance and invest the rest or in short BTITR, is better than buying life insurance as the returns from investing the difference in the premiums between the the life and term insurance can be potentially higher than the sum assured from the life insurance itself. However, it may be not so easy to do implement such a BTITR plan. Below are some issues which you should consider carefully before you start with a BTITR plan.

To implement a BTITR plan, you will need to set aside a fixed amount of money each month for investing. This by itself, requires discipline. Are you willing to set aside a fixed amount of money each month regardless of any circumstances that may happen to you for the next few decades ? The use of a GIRO plan for Dollar Cost Averaging or DCA or a Regular Savings Plan or in short RSP, if you are buying into a unit trust may prove to be helpful to maintaining this discipline. If you are ok with this, we can move on to the next issue.

The recommended investment will be to invest in exchange traded funds or ETFs in short, such as the STI ETF or the DBS STI ETF 100. Other alternatives will be to invest in index funds such as the Infinity series which tracks the S&P 500, which is a US stock index and the MSCI World Index although their expenses seems to be a little bit high.

As with all investments in equities, there may be fluctuations in the prices of the investments that you are buying and holding onto. If there is a huge drop in the price of these investments, can you still maintain the discipline to ignore these fluctuations and continue to invest regularly ? If you are still committed to carry out the investment, we will move on to the last issue.

Will you be tempted to cash out on some of your investments to fulfill your indulgences such as buying the latest gadgets or getting a new ride ? For the BTITR plan to work, the investments must be not be cashed out so that returns can be compounded to give better returns.

Do think about these issues carefully. If you do not have the discipline to stay to a BTITR plan, the consequences can be severe as you can find yourself being without sufficient coverage when your term insurance ceases. If that is the case, it may be better to buy a life insurance if you need one despite of the poor returns. In my next post, I will cover on how can one implement a BTITR plan practically.

Thursday, June 18

Buy term insurance and invest the rest

Posted by Kay at Thursday, June 18, 2009 11 comments

This post is part of a series of posts that discuss about the buying term insurance and invest the rest in detail. To access the other posts in this series, click here.

The above title is more commonly known as buy term and invest the rest or in short, BTITR. This is a topic which has been widely discussed before. As compared to the BTITR approach, the other alternative is to buy whole life insurance and this has been a more popular approach for Singaporeans. However, the more popular approach need not be the better approach and in this post, I will attempt to show why is this the case.

As taken from the guide to life insurance from the Life Insurance Association of Singapore or LIA in short, whole life insurance offers life-long protection. Premiums will be paid throughout your life although this can be changed to a limited period and this policy will pay out the sum insured and any bonuses you have built up when you die or become totally and permanently disabled.

In contrast, term insurance only offers protection for a set period of time and it will pay the sum insured when you die or become totally and permanently disabled.

The BTITR can be a better approach as the returns from investing the difference in the premiums between the whole life insurance and term insurance can be potentially higher than the sum assured from the life insurance policy when the coverage for the term insurance has ended.

As a rule of thumb, the premiums for term insurance is around ten times cheaper than the premiums for the life insurance. As such, we can use the difference in the premiums to invest. The table below, which is taken from Tan Kin Lian’s blog, who is the ex-CEO of NTUC Income, shows a comparison of the premiums for the difference type of policies and the link can be found here.

For the returns of the life insurance, the returns is likely to be around 3% and this is taken from a article on Tan Kin Lian’s website. The poor yield of life insurance policy is due to the expenses and marketing costs incurred by the insurance companies and these costs can be up to 4.5%. More details can be further found here in this article on Tan Kin Lian’s website. As such, if you are investing in the same type of investment portfolio exactly by the insurance companies, your potential returns would be around 3% + 4.5% = 7.5%. The difference when compounded over a long period of time can affect the overall returns significantly.

Now how can we get a returns from investments that amounts up to 7.5% ? One way will be to invest in an index fund such as the STI ETF or the DBS STI ETF 100. In the long run, you should be able to get a return of around 7% and if you factored in the fact that dividends are also being paid out, the returns is likely to be higher than 7%. You can find out more about the STI ETF and the DBS STI ETF 100 on my site.

Let me illustrate with a simple example on why the BTITR can be a better approach. Using the data which I have discussed above, I am going to do a comparison between buying life insurance and the BTITR approach.

Whole life policy for sum assured of $100,000 and a term insurance for sum assured of $100,000 for a period of 30 years bought at the age of 25.

Whole Life (WL) : $140.50 per month compounded at 3%

Term insurance (TI) : $140.50/10 = $14.05

Difference in premiums : $140.50 - $14.05 = $126.45

This difference in premiums will be used for investing in an index fund which is projected to give a return of 7.5% over a long period of time.

At the end of 20 years

Sum assured for WL : $100,000

Since $140.50 compounded at 3% for 20 years will be $46,126 and this is less than the sum assured

Sum assured for TI: $100,000

Invested returns for difference in premiums: $70,019

Since $126.45 compounded at 7.5% for 20 years gives $70,019

One day before the end of 30 years.

Sum assured for WL : $100,000

Since $140.50 compounded at 3% for 30 years will be $81,875 and this is less than the sum assured

Sum assured for TI: $100,000

Invested returns for difference in premiums: $170,385

Since $126.45 compounded at 7.5% for 30 years give $170,385

At the end of 30 years

Sum assured for WL : $100,000

Sum assured for TI : $0 (Since coverage for term insurance ceases at the end of 30 years)

Invested returns for difference in premiums : $170,385.

As you can see, if the investment is done properly, the invested returns is higher than the sum assured by the whole life insurance even though the coverage for the term insurance has already ended. In other words, you will be enjoying an even higher coverage than it is possible from the life insurance and this is the advantage of using a BTITR approach.

As much as the BTITR approach sounds promising, it may be difficult to implement it. In my subsequent posts, I will be discussing on the difficulties of implementing this approach and suggest a way of implementing it practically.

Friday, June 12

Why buy insurance ?

Posted by Kay at Friday, June 12, 2009 No comments

Why should one buy insurance ? The answer to this question seems to be pretty obvious to each and everyone one of us but the answer can varies. Some may see it as a form of investment such as buying life insurance that will give you some returns and coverage together while others may see it as a form of savings.

The main reason why one should buy insurance is to protect you and your loved ones from any catastrophic financial losses as a result of any unforeseen mishap or circumstances that may arise. How about considering the situations below ?

You are driving a car on the highway and you crashed into the back of the car in front. It turns out that the repair cost of the car in front is significant and you are deemed to be liable for it. Do you have the money to pay for the damages ?

You are the sole breadwinner of the family and due to some unforeseen mishap, you passed away. Will your family's quality of living change if no one in the family is able to replace your income ?

As such, do keep in mind the reason on why you are buying insurance. And if you keep it in mind, you should always consider the amount of coverage you are getting and getting a sufficient amount of coverage. Don't think of insurance as a form of investment where you are supposed to get some profits back at the end of the day. Consider it as a small amount of expenses that will hedge any unforeseen huge financial losses arising from unforeseen circumstances. In fact, you should separate your insurance needs from your investment goals.

Sunday, March 14

Definition of Critical Illness

Tuesday, December 29

Medishield

Wednesday, September 9

Disability Income Insurance

Friday, July 17

Definition of Total and Permanent Disability

Thursday, July 9

Implementing a buy term, invest the rest plan

Wednesday, June 24

Difficulties in implementing a buy term, invest the rest plan

Thursday, June 18

Buy term insurance and invest the rest

Friday, June 12

Why buy insurance ?

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