Understanding your insurance policies (Part 1 of 2)

All about knowing your insurance policy contract.

Chances that you should be owning a couple of insurance policies by now. If not, you really should know that it is not so much of a budget issue than a discipline issue you are facing. Now, instead of trusting every word and drawing from your financial adviser, learn to read your insurance policy. Trust us, it is really not that difficult.

Besides, you get to know if your adviser is pulling a fast one on you.

Credits to Chole Ng from Aviva Financial Advisers (Singapore) for clarification.

The contract of an insurance policy

After you took up an insurance policy and upon its approval, you should receive a thick booklet/ file by mailing or from your adviser. This is known as the insurance contract and contains all the details of the policy you have taken up.

Important: Your 14-days Free Look Period starts when you received your Insurance Policy document.

Yes, this means you have the rights to cancel and get your money back if you have a change of mind. You will receive 100% of the premium you have paid.

There are some exceptions to this:

  • The insurance company may send you for a medical check-up and subsequently offers the contract with no change in terms. In this case, you will have to bear the cost of the medical check-up.
  • You purchased an Investment Linked Policy, which you have to bear any loss incurred if current valuation is lower than the point of investment.

The most important document in the contract will be the Benefit Illustration, followed by all the other specific terms and details of the policy.

What is the Benefit Illustration?

The Benefit Illustration (BI), is a document whereby insurance companies disclose all benefits, cost and charges of the insurance policy you purchased.

On the BI, you will see the Policy Name, Premium Amount, Policy Term, Premium Term, Sum Assured and Supplementary Benefits (riders) if any, that you purchase.

Policy Name

The name of the policy given by the insurance company you took up your insurance policy. For more details of the nature of the insurance policy, you can refer to the insurance company website, Google it or simply use our Insurance Product Directory to learn more.

Premium amount

Premium amount is the amount of cash that you need to pay for the insurance policy to stay valid. The options available for paying your premium can be monthly, quarterly, semi-annually or yearly. There can be a big difference between paying your premium among the above-stated options.

So far so good, we hope you are not lost at this point.

Read aboutShould I pay my premium monthly or yearly?

Policy Term

Policy term refers to how long the policy stays in effect, assuming premiums are paid. Any existing health and protection coverage provided expires at the end of the policy term. When a policy reached the end of its policy term (maturity), the maturity benefit, if any, will be paid out.

Some policy may have a specific Premium Term, but the policy term stays for life. This means that the stated coverage stays valid until the insured dies.

Premium Term

Premium term refers to the number of years you need to pay your premium. There is two type of premium terms:

Regular Premium – The policy matures at the end of the same year of paying your premium.

Limited Pay Premium – Premium is paid for a certain number of years and stays valid. The validity is for a specific number of years or the surrender of your policy for cash value.

Sum assured

Sum assured refers to the amount of money your policy pays out in the event of the said insured event occurs. The insured event includes and is not limited to the following: Death, Terminal Illness, Total Permanent Disability and Critical Illness. This amount is your coverage amount.

However, this may not apply to all policies. Some policy with the Guaranteed Issuance Option (GIO) will not show the sum assured as the coverage amount. In those cases, you will see an amount used by the insurance company to calculate the premium amount. This Guaranteed Issuance Option is commonly seen in Endowment policy, which serves to provide for financial returns and less of health and protection coverage.

Read aboutEndowment Policy: How does it work?

What are Supplementary Benefits?

Supplementary benefits are commonly known as riders. The riders are added onto your main insurance policy to enhance its health and protection coverage. Riders usually added are for: Term, Early Critical Illness, Critical Illness and Total and Permanent Disability.

Riders are very important for Whole Life Policy, Investment Linked Policy and Term policy as they are Life Insurance products which can provide coverage over a longer period of time. Similarly, life insurance should form a significant part of your Insurance Portfolio Coverage.

RelatedLife Insurance

Read aboutManaging your Insurance Portfolio

Note: All riders have got no cash value as the objective is to provide coverage for a stated amount of premium.

Read aboutDo I need Insurance Riders and are they worth paying for?

 

*Simple illustration: Suppose you pay S$300 for a fixed number years for a S$100,000 Early Critical illness coverage during it coverage period. You get nothing if nothing happens, but when something happens, you are paying the premium in order to receive the S$100,000.

This is the same for the insurance company. If something happens to you, they have to pay you what they have committed to paying.  If nothing happens to you, they pocket your premium as a risk they have to take to provide you with the coverage.

 

In part 2 of Understanding your insurance policies, we will talk about the reading the financial values of your insurance policy. This will allow you to better understand what to expect financially in different situations.

 

Need a policy review? 

Contact us and our partnered Independent Advisers are available to talk to you.

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