Buying insurance is now much, thanks to comparison websites and fully online insurers. But first time insurance buyers often make mistakes, due to the complexity of the product. Here’s what to avoid:
1. Buy from the first agent you meet
Insurance agents can get pushy, and some use a technique called the “assumed close”. They will not conclude their pitch by asking if you want to buy, or if they can get back to you--they straight up produce a form for you to sign, and don’t leave you any room to back out.
The first thing you need to realise is that there’s a cooling off period. You can back out of the policy for up to a month after you sign it. Don’t hesitate to do this if you think you’ve had a bad deal, or haven’t had a chance to compare deals.
Second, you should not feel pressured to sign anything. Simply tell the agent that you feel cornered, and will not sign anything under the given circumstances. Remember that insurance policies have a long term impact--your policy might last for 10 years, 15 years, or your entire lifetime. You owe it to yourself to make comparisons before settling on a choice.
2. Accept a high effect of deduction
Most people think the “price” of insurance is policy premiums. This is incorrect. The price of an insurance policy is the “effect of deduction”, which can normally be found on the benefits illustration.
The effect of deduction summarises the cost of the policy; it includes the price of marketing the policy, the cost of the administrative work, and the income generated for the insurer for covering you.
You should calculate the value of accumulated premiums (over 15 years is a good measure), and then compare it to the effect of deduction. For example:
Say the value of accumulated premiums over 15 years is S$150,000. The effect of deduction is S$50,000. This means the effect of deduction is 33% (S$50,000 of S$150,000) of the accumulated premiums -- you would be paying out almost a third of your savings and returns as the price of the policy.
A reasonably priced insurance policy should have an effect of deduction that does not take more than 20% of your money.
3. Buy without considering your travel frequency or destinations
If your work requires you to travel abroad often, and for long periods (e.g. a month or more), this must be covered by your policy. If you do not mention the need for this, you may end up with insurance that is only valid in Singapore.
Frequent travellers often include a clause that extends their insurance to a given country. This is especially important if you travel and work in the United States, as healthcare costs there are among the highest in the world.
Including a clause will also mean you don’t have to buy travel insurance every time you fly to that particular country for work (although you might want to do so anyway).
4. Avoid full disclosure to get lower premiums
If you gloss over certain conditions or lifestyle habits (e.g. asthma, heart conditions, smoking or alcohol history), you sometimes get away with lower premiums. However, there are plenty of reasons not to do this.
The first is you are likely to get caught. The insurer may bring you to a clinic for a check-up (one of their choice), and you'll end up with a red face when the agent is told of your conditions. The second, and more important reason, is that it can void your policy.
Imagine if you end up needing vital surgery, but a “little white lie” gets exposed -- the hospital notes you had this surgery before (or another, completely unrelated one), and the insurer also catches on. Suddenly, your entire policy, including the supposed payout, becomes void. You are left to pay for your entire treatment, and years of policy payments are wasted.
It’s simply not worth the risk to be dishonest to your insurer.
5. Buy late
As you grow older, you're subject to greater health risks. We all get old, fall ill or get more prone to injury and sickness. That's life.
In order to accommodate this fact, insurers raise the premium based on your age. The younger you are, the cheaper it is to buy insurance. You're also likely to accumulate some medical history as you get older, and develop conditions that will affect your premiums.
Rather than wait until you are in your 30s, buy a long term insurance plan when you're in your 20s and have a stable income. This way, you lock in the low premiums that your youth gives you.
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