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Singapore Insurance Policies as Investment Products

Insurance policies currently available for individuals to purchase in Singapore: 1. Ter...

Insurance policies currently available for individuals to purchase in Singapore:

1. Term insurance policy
2. Residential mortgage insurance policy
3. Medical insurance policy covering major hospitalization expenses
4. General accident insurance policy covering accidents and minor hospitalization expenses
5. Critical illness, including cancer, insurance policy, where the chances of recovery are very low (would normally command an expensive premium)
6. Travel insurance policy for non-work related

Often the first kind of insurance product that people everywhere purchase is residential mortgage insurance. Taking out mortgage insurance is almost always a condition of a mortgage extended by a lender, and most people just look for the cheapest product available. Travel insurance is another insurance product typically purchased for as cheap a price as possible. Sometimes it even comes for ‘free’ with a credit card.

In today’s article, we take a closer look at Singapore insurance policies as financial investments. A life or critical illness insurance policy has historically acted as a source of funds during times such as serious illness, accident, or even death (payout to the dependents). Being essentially a financial product, the payout is based on certain terms and conditions set out in the insurance document at the time of purchase.

To receive the right to claim funds under the policy, a holder must pay a stipulated amount, known as the premium, either on a monthly or a yearly basis. The amount is determined based on a range of factors, including age, health, family history, etc, and will differ widely from one individual to another.

Gone, however, are the days when an insurance policy in Singapore would be helpful only at the time of an unfortunate event. For example, insurance companies in Singapore now offer policies which, after a certain number of years, return the premium in the form of a lump sum amount together with some kind of return. Such insurance products are naturally offered at a higher premium. Thus, a Singaporean considering taking out a life or critical illness insurance product of some kind, needs to have a clear understanding of the different typess of insurance policies that are available, and their associated costs.

Term Insurance:

This is the simplest form of insurance. The policy is valid only for a fixed term (expiry date), which can be from five to thirty years. This no frills policy usually covers accident and death. There are term insurance policies which cover serious illness as well. The premium paid on these products will not result in any other kind of return. Term insurance products are usually the cheapest policies offered by an insurance company.

Life Insurance (Endowment policy):

Apart from providing insurance coverage, this kind of policy also offers some of the features of a savings deposit. The maturity date of an endowment policy can be anywhere between 10 years and 20 years. In fact, the maturity date can be customized to suit individual needs. For example, a Singaporean can purchase an endowment policy, which will mature when he or she turns 60.

At maturity, the policy holder will receive a single lump sum payment from the insurance company. If the policy holder is not alive, then the benefits are passed on to the dependents as designated at the time of purchasing the policy.

The amount received depends on the nature of the endowment policy:

- Participating (Par) policy: This kind of policy consists of two financial components, namely, an assured sum and a variable bonus. The assured sum would usually be less than the accumulated paid up premiums because of the additional insurance protection offered. The variable bonus would depend on the profits from the ‘participating fund’ of the Singapore insurance company.

- Non-participating (Non-par) policy: Payment upon death or maturity is limited to the assured amount. There is no variable bonus.

- Invest Linked Policy (ILP): A portion of the premium paid under this policy will be used to invest in various mutual funds. The policy holder will be provided with a list of funds to select for investment. Naturally, if the fund performs well, the ILP would result in an appreciable payout at maturity. This is apart from the general insurance cover. There are even ILPs, which accept a single bulk payment instead of monthly premiums.

Broadly speaking, an insurance policy would be made up of the following charges:

Mortality Charges:

This is the amount of premium to be paid for every $1000 of insurance cover. The amount is calculated by the insurance company’s actuary, and is based on the age of the insured. So for example, if the age of the insured party is 35, then the actuary will work out the premium according to the statistics for the mortality rate of people aged 35.

Morbidity charges:

Morbidity charges are for the critical illness component of an insurance product. Calculations are similar to those for the mortality charges, except that the statistical data used will be that of ill people belonging to a particular age group.

Other/additional charges:

All those charges (policy fees, administrative charges, etc) relevant to the operations of an insurance company will come under additional charges.

Commissions:

This is the fee paid to the authorized Singapore representative of the insurance company. Only a properly licensed and authorized representative can make recommendations about insurance products in Singapore. Authorized representatives have an obligation to explain in full why they are recommending particular insurance products, and the commission is paid over for that purpose. Clearly they need to fully understand the insurance needs of their customers in order to make suitable recommendations!

Anyone considering purchase of an insurance product should always ensure that he or she deals only with a licensed seller. Moreover, always take the time to read the fine print, because it will save unnecessary trouble related to claims in the future.

(By Karthikeyan Narayanan)

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