10 Things to Consider Before Buying an Insurance Policy
If there is anything 2020 has taught us, it is to expect the unexpected. One moment we are healthy, employed and able to travel. And then BAM! A global pandemic that affects every aspect of our lives.
Insurance has always been about the transfer of an unknown risk. Insurance contracts function by shifting the risks you face every day to your insurance company for a premium. Many people buy insurance for peace of mind. At the end of the day, no one wants a life of financial or physical suffering should the unexpected happen. But before we purchase any policy, we should consider the following:
1. Do I have emergency funds in place?
An emergency fund is essential as it insures against life’s unexpected expenses. This fund is meant for when retrenchment occurs or for sudden expenses like car repairs or house maintenance work that cannot be avoided. You do not want to be just 1 pay-check away from not being able to pay your mortgage or a car repair. It thus gives you a sense of freedom knowing that you have some funds in place should you be faced with a financial strain.
How much should you have as emergency funding? 6 months to a year of expenses is a good amount. But what is more important is even having this fund in the first place, no matter how big or small.
And this fund should NEVER be dipped into for any frivolous purchases. These funds should be liquid and not stashed away in investments or long-term savings as they are truly meant as a rainy-day fund.
2. Do I have any existing medical conditions or am I seeking treatment currently?
Money alone does not buy insurance. Health does too. If you have a clean bill of health, you will have a full suite of products to choose to purchase. However, should you have even the slightest medical condition, it may pose a problem in you purchasing insurance. You might face one of the 3 scenarios:
Pay a higher premium for the same coverage
Have an exclusion imposed for the medical condition
Be declined for coverage
3. Do I have future plans or objectives that I would need to meet?
Thinking of buying a house? Getting Married? Having a baby? These things can affect when or how to purchase an insurance policy. For short term goals, saving your money in a bank or a liquid instrument is good as it gives you the freedom to dip into your funds. However, you should still consider stashing away some funds or medium to long term goal concurrently too.
4. How much can I set aside comfortably each month?
Make sure that premiums are within your means. Rain or shine, you should be able to afford them. Consider this a fixed expense and therefore plan for it in the most conservative manner. Usually, you end up setting aside around 10% of your income to address your insurance needs (This percentage increases should you look into savings and investment as well).
5. How should I prioritise my needs?
Do I already have existing coverage? Have I started saving? Do I have existing loans? Do I have a dependent? Do I have a family history of illness? Are there family members who are not covered currently and are at high risk? If you can answer these questions, you can then shape how to prioritise what type of coverage you might need. Usually, I tend to follow the airline's safety guidelines:
Put on your own oxygen mask first before tending to the rest. Ensure you are adequately covered and then tend to the other needs you may have.
6. How long a period do I want to be covered for?
Do I only want to be covered for as long as I work? Do I want coverage till 100 or for the rest of my life? For some plans like Accident Coverage and Income Protection, the coverage will only last till a fixed age (For E.g., an income protection plan will only cover you till age 65). However, for other plans, you can determine how long you wish to be covered for.
7. Do I want to have returns on my policy or have a pure coverage plan?
Term insurance is pure coverage plans. They do not have any cash value in them. This means that for the duration the term insurance is in place, you have coverage. Once the term ends, the coverage also ends but you do not get anything back in return. This is why term insurances tend to be much cheaper. Whole life, investment-linked and endowment plans are plans with cash value. They come with returns for the dollar invested. As a result, these plans tend to have higher premium amounts.
8. Do I want to keep my insurance and investment needs separate?
Investment-Linked policies offered by insurance companies allow you to invest as well as be provided with insurance coverage.
For people without investment knowledge, time or the resources to invest, an investment-linked policy could be a good policy to have. If you are a savvy investor, however, you might want to have a separate policy for your insurance needs and invest on your own using an investment platform.
9. What is the financial health of the insurer?
As much as you need insurance plans that can weather any financial storms, you will also need an insurer who will stand tall like the brick house in the story of the 3 Little Pigs. You will need an insurer with a strong financial backing without the risk of going bankrupt.
10. Who will be the best agent for me?
ME! The relationship you have with your agent is most likely going to be a long-standing one. Insurance is by no means a short-term purchase. We are talking about years before you may even need to tap on the coverage. Thus, an agent who can be there for you is essential.
Someone who can answer you at the time of need
Someone who thinks in your best interest
Someone who can outline the pros and cons of the policies so to find the right fit for you
Someone who can help you process a claim or sort out the paperwork
Someone you like and you can trust
At the end of the day, there are many considerations before you purchase a policy. Do not let this hinder you from getting insured! Remember, it is better to get insured sooner when you are free of any medical conditions. That is when you get the most favourable terms to your policy. Delaying your insurance purchase might cost you more in the future. Your future self will thank you for the careful considerations you make today.
If you have any insurance-related questions, I am all ears! Drop me a message using the contact box below and I will be happy to help. 😊