Insurance.. Precaution? Investment? or.. Unnecessary Expense? (2)

First, I would like to apologize for the late posting of this post... :-)

Second, I will get right down to business. As promised, I will talk about insurance from clients' perspective.

What do I mean by that?

Well.. everybody (or family) has specific needs in life, driven by each person's unique situations, opportunities, objectives and choices.

While insurance, as a financial buffer, is simply one of the many financial strategies that can be applied, or added, to a person's (or family's) financial management as a part of the whole financial planning.

When it is carefully and correctly chosen and applied, it can be a great protection and additional investment in the future. However, when it is badly chosen, it can definitely cause further problems.

Hmm.. am I making any sense?

Let's see..

As I mentioned in my previous post about insurance, these days, insurance industry is getting more and more competitive and insurance companies need to make good offers to gain the interests of prospective clients. The most visible part of the competition is, how much return these insurance companies are capable and willing to give back to clients after years of contract.

At the same time..

Prospective clients need to recognize their financial situation as a whole to be able to make the best financial decision on how to structure their financial investment and how they should diversify it.

First, prospective clients need to make a list of properties, they need insurance cover for and for how long.

Second, they need to decide how much of the properties' values they would like to be covered for.

Third, these data need to be cross-calculated against the whole income and other financial strategies applied by the prospective clients or families.

Hmm.. I guess I should give a clear example..

It is something like this..

When you feel the need for an insurance in your family arises (for house, vehicle education or life), start looking around for the type of insurance that fits your needs. Remember to look for:

1. Combined packages: education+health, life+health, house+contents, vehicle+accidents, etc.

2. Additional benefits: how much cash benefit that you can receive from the investment part of the insurance package and after how long.

Then, cross-check it with your current financial situation:

1. How much of your current salary you are prepared to set aside for the insurance (after allocating for daily needs, routine payments and savings).

2. Make a list of dates which you would like to receive the benefits from the investment part of your insurance (children's school entrance payment due dates, family holiday final booking due dates, your retirement expectation year, etc.)

ASK the insurance agent to provide you with TWO or THREE possible choices of premiums that are likely to be met by your calculation.

Remember!

Insurance, even when it is combined with an investment plan, should NEVER be your only or main choice for investment.

Your personal or family investment should consist of a number of diversified choices, such as, savings, short-term and long-term time deposits and/or gold. If possible, properties or land and stock or share can also be considered.

The reason for this is..

Insurance is not savings, although it has an investment part of it. The premiums that you pay each year consist of two parts, insurance cover and investment benefit. Therefore, trying to achieve the full amount of your future needs from an insurance would cause you to pay a high premium, and there is almost no flexibility in regard to the timing of when you can withdraw your benefits.

What you should do..

Secure one-third to half of your future needs with an insurance+investment package, while at the same time, open a new savings account in your bank to achieve the remaining amount of that you aim for.

Whenever you have the enough amount in your saving account to open a time deposit, open one. Time deposit offers higher return than a savings account, so you will benefit more from your money.

Another alternative..

Banks also have programs called 'planned savings', which are aimed to reach a certain goal that you set for a time in the future; school entrance fee, holiday, etc. With this type of saving, the bank will withdraw a planned amount of money from your main account each month for the length of the saving plan.

Savings account, time deposits and planned savings account are good choices to diversify your financial investment (and its risks) and to complement your insurance+investment package.

A good combination of financial strategies applied to your investment can help you secure and grow your wealth for a long time. Not only you can plan your future well, you can also enjoy your life after retirement comfortably.

If you have any additional thought to add to this post, please fill in the comment form below.

Thank you for reading and have a nice day!

Insurance.. Precaution? Investment? or.. Unnecessary Expense? (1)

Yes, I know.. repetitive calls from insurance agents can be very annoying, especially when the calls are blind calls, and you are not considering taking insurance.. ;-)

However, what if you are thinking about having an insurance policy, but you feel that you don't know enough about it, and you are not sure how to decide about which type of insurance you should choose?

What we need to understand, to begin with, is that insurance is 'transferring part of our future risks to a third party (insurance company)'..

Why do I say 'part'? Because, we still have to pay a regular fee to the third party as a bind. This regular fee is known as a premium.

There are different types of risks that can be covered by insurance, some common examples are:
home/building against theft or fire,
vehicle (car/motorcycle) against theft, break down or accident,
health for hospitalisation or accident,
education for future plans, and
life in cases of accident or death.

There are also other types of insurance, but in this post, I will only discuss the common ones.

There are certain aspects that will be taken into consideration to decide the amount of premium we have to pay for the insurance we take, for instance:
total value of building and contents, in the case of building/home insurance,
age and make of vehicles, in the case of vehicle insurance
age and health condition, in the case of health and life insurance
age of child(ren) to be insured and how much to be collected at due date, in the case of education insurance.

All these aspects are explicitly stated in the insurance application form, and your insurance agent is able to explain in more detail if you need more information.

Once all your details are collected by the insurance agent, the agent can then tell you (based on the insurance company rule) how much premium you need to pay for each insurance period. Most insurance policies require annual (yearly) premium payments, while others, might present their calculation in an annual amount but allow clients (you) to pay in monthly or quarterly installments.

Referring back to the point where I mentioned that having insurance is 'transferring' part of risks to a third party is the only way to save you the shock of learning about the amount of premiums you have to pay for the insurance you need.

Insurance cannot cover any risks suffered by their clients, unless they accept enough money from clients to re-invest in other businesses to grow their profits. Insurance companies are businesses, and more than that, insurance companies are running a high-risk type of business.

Therefore, if the insurance company who approaches you offers a very low premium for a high coverage that you ask, BEWARE! You really need to check further any relevant details about the insurance company background!

However, in this era, with the strong competition in the insurance industry, insurance companies need to 'manage' their clients' expectation very well and make offers that can benefit their clients more.

This condition, resulted in various packages of insurance that do not only require premium payments by clients for insurance cover as a benefit, but also offer additional benefits, such as, retirement savings or investments.

How is it possible?

Here is how..Insurance companies, as a business entity, must ensure their ability to keep running and paying their clients' insurance covers whenever their clients claim it. At the same time, to stay competitive against other insurance companies, they have to keep the premium they offer as low as possible. Therefore, insurance companies must re-invest some of the money collected from their clients in other businesses after allocating the necessary amount to be placed in another insurance company, to insure their business.

The amount that insurance companies invest in other businesses is aimed to generate ongoing profits to support their main business, which is covering people's assets and lives (clients' insurance policy). From this operation, when successful, insurance companies can do a lot more than simply pay clients' claims. They can also offer some return to clients, at least to give back some (or all) premiums that have been paid by clients after a few years.

These types of packages give better offers when clients choose the long-term insurance policy (10 years or above). Some of the common packages are:

health insurance + retirement package, where you have to pay a premium for the health insurance until the age limit (usually around 55-60 years old), and you can collect the retirement benefits a few years after (usually between 75-90 years old). With this type of packages, you might still be covered for sickness or hospitalization up to the benefit collection age, although not all insurance has the same rules.

health insurance + education savings package,where you have to pay a premium for the health insurance until the age limit (usually around 55-60 years old), and you are entitled for some part of the total benefit payout when your children are entering new stage of education (entering elementary school, junior high school, senior high school and university).

The types of packages offered by each insurance company are different, so you should have a look at more than one company to find the one that suits you the best.

A new development of an insurance package is health insurance + unit link. This type of insurance is directly linked to a set of investment units (shares/stock) that are chosen by the insurance company's investment managers.

This type of insurance is riskier than the saving packages, although whenever the share market is going well, the unit link investment is going well too and clients can reap high profits from their investment linked to the insurance.

Why is it riskier?

Here is why.. by offering a unit link insurance policy, insurance companies are transferring back to clients, some of the risks they are facing when they are re-investing their funds to support their business. So, rather than offering a set amount of money, they will pay clients in later years, insurance companies offer clients the choice of having limited control over their wealth invested in the insurance companies. By doing this, insurance companies are limiting their loss, if the businesses they re-invest in suffer losses or even go bankrupt.

Clients having unit link insurance usually are not allowed to change the units (shares/stock) placements. However, they can choose how much (in percentage) of their premium to be allocated in the share market and/or money market. This gives clients some (limited) control over their money invested in the insurance company.

The fact that clients have some control, means that they need to be in a position to take decisions to protect their own wealth. Therefore,clients must have sufficient knowledge about financial markets and keep themselves up-to-date with any development in the financial market, in order to ensure the safety of their investment linked to their insurance policy.

Having discussed about various types of common investment policies, I hope this post can provide some useful information for any of you wondering about insurance.

I will discuss more about insurance from clients' perspective in my next post.

Have a nice day :-)