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Question and Answer on Universal Insurance
Go to, Index, Page 1, Page 2, Page 3, Page
4, Page 5
1. What is the Universal Rule of Insurance?
2. What is 'self-insure'?
3. How do I self-insure what I can afford to
lose?
3.1. Fully self-insure.
3.2 Partially
self-insure.
3.2.1. Co-insurance
3.2.2. Deductible
4. What happens when I insure what I can afford
to lose?
5. What happens when I self-insure what I cannot
afford to lose?
6. How do I insure only what I cannot afford to
lose?
7. How else do I save on premiums?
8. Why is it called the Universal Rule of
Insurance?
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1. What is the Universal Rule of Insurance?
Self-insure what you can
afford to lose and ONLY insure what you cannot afford to lose. The
application of this rule will guarantee with scientific predictability the optimal
solution to your insurance needs. No longer will insurance planning be
subject to the individual planner’s whims and fancies. As in all scientific
experiments, the outcome should be predictable when a systematic approach
is adopted under a given a set of conditions. Although an individual has
unique needs and thus different conditions, the above rule should at least
minimize the risks of over or under-insurance based on the traditional ‘trial
and error’ method usually employed.
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2. What is 'self-insure'?
Life insurance exists solely because of the uncertainties in life and
the certainty of death (besides income tax). The little uncertainties in
life such as having to pay for flu medication is a risk we can afford to
absorb, or in other words, self-insure. Self-insure simply means to absorb
your own risk through your own financial resources. Technically, you become
your own insurance company. Of course you then save on the premiums
payable. Therefore the more you self-insure, the more money you save! Thus the ultimate goal of life
insurance planning is to self-insure wherever possible and render the
services of the insurance companies redundant. Fortunately for
people in our profession, this is only an ideal that is rarely achieved by
most people within their lifetimes. Nevertheless, it does serve as a
compass to guide us on the path on life insurance planning.
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3. How do I self-insure what I can afford to lose?
There are two ways to do it:
3.1. Fully self-insure.
This method is practiced by
almost everybody unconsciously in everyday life. For example, few people
would bother to insure against the outpatient medical bills for common
illnesses such as flu and fever for the simple reason that they can easily
afford to pay out of their own pocket. They have effectively self-insured
against such risks. Another example would be the case of a
multi-millionaire having say a million dollars in cash; chances are it
wouldn't hurt his dependents drastically whether he lives or dies,
notwithstanding his estate duties payable. In retrospect, who would leave a
million dollars in the bank unless you are Bill Gates? Perhaps it makes
better sense to park say 3% of the million dollars in insurance to create
another million dollar estate and invest the balance of the 97% of the
million dollars! The 3% is of course the premium payable to generate the
extra $1 million estate. That way the multi-millionaire could probably
generate better yields with the remaining 97% since he can now afford to
take bigger risks. Surely a win-win situation!
Furthermore, the cash value
that builds up over the years will also serve as a guaranteed overdraft
facility to act as a buffer for emergencies. Thus the liquid cash required
to self-insure will be offset by the cash value as well.
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3.2 Partially self-insure.
When we cannot afford to absorb the risk fully by ourselves, it is only
wise to rely on the insurer to share or fully bear the risk concerned such
as the expensive treatment costs for catastrophic illnesses or major accidents.
Risks can be split with the insurance company through a co-insurance and/or
deductible.
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3.2.1. Co-insurance
A co-insurance splits the potential lost between
the insured and the insurer. The greater the proportion of the risk the
insured absorbs, the lower the premium he has to pay to the insurer. In CPF’s
Medishield plans, (refer to table above) the insured absorbs 20% of
the balance of the claimable amount after the deductible. Therefore under
Medishield Plus Plan A, if the total bills come up to $5000, very little
would be claimable after the deductible and the co-insurance. However for
major expenses such as kidney dialysis and chemotherapy, CPF has waived the
co-insurance and the deductible although an annual limit is still pegged to
the amount claimable.
Through the combination of the co-insurance and
deductible, CPF has managed to provide very affordable premiums and a
coverage of up to $200,000 until age 75. Without them, the premiums would
easily be ten times or more for the equivalent coverage. The risk of paying
for the deductible and the co-insurance is spread further by using the
insured's Medisave account instead of cash. Furthermore, should the insured's Medisave and cash prove
insufficient, even his family members' Medisave account can be used as
well. However,
it is critical to note that if the insured claims from his Medishield plan
in his early years, little or none of the balance of the coverage may be
left in his later years. This is true especially of the basic plan that
insures only up to $80,000; a figure that may not be adequate say 30 years
down the road. Thus it is advisable to rely more on personal or company
medical insurance and reserve the use of the Medishield plans for old age.
Other examples of such cost-effective products
include the income disability benefit called the Paycare Rider offered by
Great Eastern Life. A
total coverage of say one million dollars could be available for just $1 a
day IF you qualify (see pt. 4 of pg. 1- Ten things your insurance
agent does not tell you).
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3.2.2. Deductible
The deductible is the minimum amount to be paid
by the insured before an insurance policy starts paying benefits. The most
common example is perhaps the Central Provident Fund's Medishield plans
that have deductibles from $500 to $4000, depending on the insured's choice
to absorb the up front cost involved based on the type of plan taken. Those
who prefer ‘A’ class wards can opt for Medishield Plus Plan A that has a
deductible of $4000. Therefore should the claimable amount be $10,000, the
insured would have to absorb (i.e. self-insure) the initial $4000. The
basic plan that caters for ‘C’ class wards has a deductible of only $500 on
top of the substantial government subsidies. However it should be noted
that sometimes there maybe no ‘C’ class ward available and the deductible
would be $1000 instead for B2 class wards and above. With rising expectations
among the affluent, Plan A would cater to their needs better. Those who
prefer a ‘no frills’ approach can settle for B2 or C class wards and enjoy
government subsidies on top of the lower charges and premiums.
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4. What happens when I insure what I can afford to
lose?
This is a breach of the Universal Rule and leads to inefficient
insurance planning. In fact you would have over-insured by insuring the
unnecessary risks involved. For example, accident plans that cover against
temporary disabilities pay a weekly income benefit from the first week
itself. In most cases this is unnecessary since most of the life assureds
can easily afford to absorb (i.e. self-insure) a loss of income for the
first few months or so. Notwithstanding the fact that illnesses are not
covered, the premiums are relatively much higher when compared to Paycare.
(GELife's income disability plan) The
irony is that should the disability become permanent, the accident benefit
usually ceases after 52 weeks just when the insured needs the coverage
most. Premiums allocated for such plans can usually be better used
elsewhere or saved instead.
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5. What happens when I self-insure what I cannot
afford to lose?
You are under-insured (NOT self-insured) and a
potential time bomb ticks away. Many of us take pride in the fact that we
do not gamble or have other vices. However the biggest gamble we can bet on
is with our good health and earning power; these being the biggest assets
of young professionals. Sometimes the bets even extend beyond ourselves and
our families are often adversely affected as well due to lack of adequate
insurance cover in the unfortunate event of prolonged disabilities.
Therefore we are only optimally insured through the application of the
Universal Rule; a breach of either the former or the latter part of the
rule will respectively result in over-insurance or under-insurance.
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6. How do I insure only what I cannot afford to lose?
You may have noticed by now that the higher the deductible and
co-insurance you absorb in an insurance plan, the lower the premium will be
for the same sum assured. Therefore,
under the Universal Rule of Insurance, we should always seek to take up the
maximum deductible and co-insurance we can afford to ensure the minimum
premium without incurring any loss in effective coverage.
By applying the above rule, we should self-insure wherever possible and
pocket our own premium; otherwise when we insure we should go for the
maximum deductible and co-insurance that the insurance policy provides.
This will ensure the lowest premiums possible with no reductions on the sum
assured or the coverage. This is also true for car and housing insurance.
However, saving and investment plans such as whole life, endowment, living
assurance and investment-linked policies do not have deductibles or
co-insurance. Their benefits go beyond protection needs alone and should be
considered in conjunction with other insurance plans. Only then do we
ensure that we pay the minimum premiums without shortchanging ourselves of
the required coverage.
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7. How else do I save on premiums?
First, engage a good insurance agent. With an increasingly complex
market that is ever-changing, it is imperative that you have access to
well-qualified advice not just on product types but on sound insurance and
financial planning as well. A well-designed insurance plan will give you
greater peace of mind and savings on premiums over many years to come.
Secondly, start young. Life insurance is cheaper the younger you are.
With lower premiums you pay lower commissions too and the agent probably
has to service you over a longer lifetime as well. In this instance, you
can have your cake and eat it too!
Thirdly, buy when your health is still good. Typically, the more
comprehensive the coverage, the stricter the underwriting requirements will
be and vice versa. For example, plans such as Paycare are restricted to
only healthy Singaporeans earning reasonable incomes and above. Others may
be considered strictly on a case-by-case basis. Complex underwriting
requirements also mean that you do not usually find such plans marketed
through credit cards or newspaper cuttings.
Finally, it is prudent to note that life insurance planning is becoming
increasingly complex and requires in depth study into the mechanism of its
functions. Any attempts to adopt insurance planning with your own approach
may give you a false sense of security that could have disastrous
consequences. Just imagine prescribing your medicine over the long term and
buying it over the shelf; the consequences could be strikingly similar.
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8.Why is it called the Universal Rule of Insurance?
For the two reasons as follow:
1. It applies to both the insurer and the insured i.e.
both the macro and the micro perspective. An insurer that accepts a policy of say one million
dollars will seldom take on the full risk by itself. It would probably
share the risk with a reinsurer and retains the amount that it feels it can
comfortably afford to lose i.e. it self-insures and insures through the
reinsurer. Of course the larger insurers would be in a better position to
accept greater risks than the smaller insurers. Economies of scale would
also work to the advantage of the bigger companies. Small wonder that
insurance companies have stood the test of time far better than most other
businesses through the application of the above rule, consciously or
otherwise. Thus the onus is on us to adopt the insurers' practice of the
above rule as well. They are the experts after all.
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2. It applies to both life and general insurance. As mentioned
earlier in point no. 6, the above rule extends way beyond life insurance.
Virtually all forms of general insurance including marine, car, housing etc
would have deductible or otherwise known as the excess. Co-insurance is a
common feature too.
(Omissions and exclusions excepted)
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