Insurance 101: It’s Your Life, Protect It
(First in a Series)
The way of life is all about enjoying the things that matter to you most – family, friends, freedom and your future. Insurance can help safeguard everyday life. But for most people what they have may not be enough to protect what they treasure in the event of an accident, sickness or death.
There are many forms of insurance and each plan can cater to your different stages in life such as planning the finances for a wedding, buying a first home, financing children’s overseas education and retirement planning. Other plans include protecting your legacy, business and mortgage. Good financial planning is most likely to address all those aims in congruence.
Life insurance works in much the same way as insuring your home or car – but it protects your most valuable asset – you. It gives you and your family financial protection against the financial loss that can happen due to premature death, critical illness or total and permanent disability. Insurance can also give you a retirement income or act as a financial back-up during unforeseen circumstances and protect you against healthcare costs.
A life insurance policy is a legal contract between a policy owner and an insurer, wherein the insurer agrees to pay an accumulated sum of money to the policy owners’ family members on the insured individual’s demise or illness. In return for this benefit, the policy owner is required to pay the insurer a certain pre-determined amount (premium) at regular intervals or in lump sums.
How does life insurance work?
Life insurance is based on a mechanism called risk pooling, or a group sharing of losses. People exposed to a risk agree to share losses in a fair basis. They transfer the economic risk of loss to an insurance company. Insurance collects and pools the premiums of thousands of people, spreading the risk of losses that will be sustained by the members of the pool, insurers can fairly spread the cost of the losses to all the members. The risk of loss is transferred from one to many and shared by all insureds in the pool. Each person pays a premium that is measured to be fair to them and to all based on the risk they impose on the company and the pool.
Underwriting is a term used by life insurers to describe the process of assessing risk, ensuring that the cost of the cover is proportionate to the risks faced by the individual concerned. People with the same or similar risk pay the same or similar premium rates.
Statisticians will calculate the insurance premium applicable to you based on your lifestyle details. It is thus obvious that someone who is obese or someone who already suffers from numerous health problems will have to shell out a larger sum as insurance premium than someone else that is fit as a fiddle. Some insurance policies may need you to undergo a medical examination.
Types of insurance products
There are different basic types of life insurance policies. It is important to receive advice from a professional financial planner so that you can make an informed decision about what type of coverage is best for you.
Whole Life Insurance
With whole life insurance, you get life-long protection that typically last till you are 100 years old. Premium payment can be for your whole life or limited which means you can pay premiums for certain years and still enjoy lifetime protection. However, the premiums paid for a number of years will be higher than for whole life. The policy will pay out the coverage amount and any bonuses you have built upon death or total and permanent disability.
This plan is for protection and at the same time it has a savings element as you can cash it out if you need the money.
With term insurance, you get protection for a set period e.g.10 or 20 years. It pays the coverage amount upon death, total and permanent disability, or terminal illness during this period. There is no savings element in this product and premiums are relatively lower for the same coverage you receive from whole life insurance.
Endowment insurance is primarily for savings but also comes with protection. The policy pays your savings goal sum and any bonuses you have built up at the end of the set period of time (maturity date), upon death or total and permanent disability if it happens during this period.
Investment-linked plans (ILP) give you the opportunity to build your wealth while receiving protection. Part of your premiums buys life insurance protection and the other part buys investment units in a managed fund. Fund managers help you invest on your behalf.
Investment-linked plans are flexible and can be customised to potentially yield higher returns. You can adjust your protection anytime, make partial withdrawals, take a premium holiday etc.
It is important to note that investments come with risks and you need to consider key factors such as:
Risk profile – Sound investing begins with a good understanding of your own investment personality. Before you start investing, you should ascertain your investment appetite by answering a few questions about investment and risk profiling.
Investment objective – Are you investing to hedge against inflation or are you investing to grow your capital?
Time horizon – Your investment time horizon is the number of years you have to invest to achieve your financial goals. The more time you have, the more options you have. Your time horizon would impact how much your savings can grow, what assets you can invest in and how much risks you can take.
(Next in the series, BizDaily will feature how to build a successful retirement plan as we break down the process needed to plan, implement, execute and ultimately enjoy a comfortable retirement).
A Forward-Thinking Companion Guiding You Ahead
Manulife Financial is a leading Canada-based financial services group with principal operations in Asia, Canada and the United States. In 2012, we celebrate 125 years of providing clients strong, reliable, trustworthy and forward-thinking solutions for their most significant financial decisions. We in Asia for 115 with operations in 1 territories.
Manulife extends our financial solutions in a broad range of product categories:
– Protection for your loved ones
– Wealth Management
– Retirement Planning
– Estate Planning
– Education Planning
– Mortgage Protection
– Income Protection
– Business Insurance