It’s everyone’s worst nightmare - waiting for a parent, child or spouse to come home, only to receive the dreaded phone call saying there’s been an accident. Not only might your loved one be gone, but now you have to deal with a mountain of costs. Funeral costs, bills, even leftover debt. Without insurance, you might have to sell your home, your car, and lose even more than you already have.
Insurance aims to protect you, your family and your assets from unexpected circumstances. You never know — an accident or death of a loved one might suddenly change your life. In those moments, you would likely wish you’d prepared for the financial impact.
Some types of insurance are compulsory, such as car insurance, whereas others are for peace of mind, knowing that you are financially covered for specific events. There is a wide variety of insurance policies available, each tailed to individuals in specific occupations, income brackets and life stages.
As a concept, insurance is pretty simple. If an unfortunate event were to happen and you lost something that you might not be able to afford to replace yourself, you could protect yourself by paying a relatively small amount of money (a "premium") in exchange for financial compensation from an insurance company, just in case it does happen.
Insurance companies can do this by pooling risk through insuring many people wanting the same insurance coverage and collecting premiums from all of them. Based on statistical data, the insurance company will know that it is highly unlikely that all will have that "something terrible" happen at the same time, and the insurance company will be able to settle the claims made. They are profitable businesses when they get it right, as they provide not only financial coverage in the event of those “unfortunate events" happening, but also peace of mind even when they don't.
Risk pooling itself is an ancient practice - Phoenician traders around 1200 BC were covered by some of the earliest known insurance policies to protect their ships against loss of cargo and crews at sea.
Photo by Chatterton, E. Keble on Wikicommons
For modern-day individuals, just as it was for ancient merchants, it is very important to take inventory of your belongings before taking out insurance. This will help you best assess your needs to select the right policy for you: Ask yourself what it is in life you want protection for. These include incidents such as damage to your house or car, the death of one of your family’s main income earners, or critical illness.
After establishing your needs and choosing the right policy, you will be paying a premium, usually at a monthly, quarterly, or yearly schedule. Yearly payments are generally the most economical. One-time payments are also possible – e.g. travel insurance. Premiums will vary, depending on the risk and the potential value of what it is you wish to insure.
If a covered event occurs, you can claim on your insurance. You’ll need to inform the insurer of what has occurred before an investigation determines the outcome.
According to a 2020 survey by reinsurer Swiss Re, Singaporeans have the highest average mortality protection gap per household in all of Asia-Pacific. Singaporeans have lower life insurance ownership than in other developed market economies like Hong Kong and Japan. Perceived high cost is the main barrier to purchase, followed by a negative perception of insurance in general.
A protection gap is a difference between the resources you need and the resources you have available in an emergency.
The main resource you need is usually cash - money to pay expenses, bills, and loans. Without insurance, in an emergency, your only resources available are your savings and (hopefully) an emergency fund, which may not be sufficient.
Being underinsured means that you have a large protection gap and that you are financially vulnerable in times of unfortunate circumstances.
Unfortunately, insurance is something not taken seriously enough by many, in particular millennials. Many consider insurance to be too expensive to budget for and associated solely with issues that usually present themselves in later life. Though that may be true to an extent, it does not mean that we should not arm ourselves with the appropriate knowledge to make a more well-informed decision.
FYI, here’s a list of the major insurance companies in Singapore. They offer competitive products and are regulated by the Monetary Authority of Singapore (MAS). It’s best to compare products before buying!
For Muslims and others, an alternative to conventional insurance can be found in Islamic insurance, or Takaful. The end result of protecting against a potential negative development remains, but the mechanisms are different and deemed acceptable by religious authorities.
Takaful is based on a pact among a group of people to jointly indemnify losses from a fund they donate to collectively. Similar to conventional insurance, Takaful contributions are invested, however, only in Shariah-compliant businesses.
There are four main types of insurance that we consider: health, life, critical illness and general. Often, critical illness is bundled with life, as it is often sold as a rider, or health, as it addresses medical issues, but we believe it is important enough to be listed on its own.
Insurance can be an unappealing topic. Its association with unfortunate events and later life is enough for many to hit the snooze button on understanding it. People often look at the price of premiums, in particular life-long premiums, and decide that the money would be better off invested. Investing is a more exciting topic, as people get drawn to the chance of having spectacular returns.
However, it's important to understand that both insurance and investing are essential for achieving your long-term financial goals. In purpose, they are dissimilar, with investments aiming to grow our existing and future assets, whilst insurance protects both our existing assets and our ability to generate future income. If you are to get into one topic, first, we suggest you learn a bit more about insurance. Investments are part of a lifelong learning journey, so start with a solid base of understanding to protect what you have, what you will grow and what you love.
WHAT IS INSURANCE? COMPLETED. ✅
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