It’s Time You Protected Your Finances: An Introduction to Insurance

A beginner’s guide to understanding and getting started with insurance

Nobody wants anything bad to happen, but you never know when the worst will happen. Insurance policies help support you, your family and your assets from financial loss in any unfortunate and unexpected events.
Make sure you’re covered with life, health and general insurance. It’s important to buy insurance even when you don’t need it. If you wait until the moment that it is needed, then it’s likely to be too late to buy.

The premiums should not be the deciding factor on which policy you choose. Before buying, consider other factors such as benefits, coverage and other features.

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.

How Does Insurance Work?

As a concept, insurance is pretty simple. Suppose an unfortunate event were to happen and you lost something that you might not be able to afford to replace yourself. In that case, 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 by 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 "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 financial coverage in the event of those “unfortunate events" happening and peace of mind even when they don't.

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 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 happened before an investigation determines the outcome.

What Is a Protection Gap?

A protection gap is a difference between the resources you need and available resources in an emergency.

The main resource you need is usually cash - money to pay expenses, bills and loans. Without insurance, your only resources available in an emergency are your savings and (hopefully) an emergency fund, which may not be sufficient.

Being underinsured means you have a significant 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. This is understandable, as insurance can be a tricky topic to wrap your head around. Many consider insurance 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.

Takaful / Islamic Insurance

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.

Person using the laptop with a planner notebook to the left of it — Photo by Avel Chuklanov on Unsplash

Types of Insurance

There are four main types of insurance that we consider: health, life, critical insurance 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.

Health Insurance

Needless to say, health insurance works to protect you and your family against the medical costs of serious illnesses or accidents. The insurer pays some or all of a person's healthcare costs, typically including medical, surgical, prescription drug, and sometimes dental expenses incurred. There are almost an infinite number of permutations (and hence can be extremely tricky to navigate if you try to do it by yourself!), but usually, the insurer would reimburse the insured for expenses incurred or directly pay the care provider.

A person wrapping a beige plaster on her injured finger — Photo by Diana Polekhina on Unsplash

Health insurance types include:

Disability income: provides fixed monthly income for accidents or illnesses that put you out of work
Baby insurance: for babies
Maternity insurance: covering a prelist of pregnancy complications and a prelist of congenital illnesses for the baby

Life Insurance

Life insurance aims to protect your loved ones, who may be reliant on your income, with financial support in the event of your death or permanent disability. In summary, there are two types of life insurance – term and whole life.

The main differences between the two types are:

1) How long your policy will cover you

2) The compensation you receive if you do not make a claim by the end of the policy life.

3) Premium payment term. Term is always pay-as-you-go, whereas whole life has the option for limited payment term, meaning that coverage may last for a period much longer than you were paying premiums for.

Term life insurance is the most straightforward and affordable life insurance product. It’s generally more affordable than whole life insurance since you’re only insured for a fixed period. The younger and healthier you are at the point of purchase, the lower your premium should be. Note that if you haven’t made a claim at the end of the term, you won’t receive any of the money you paid in premiums back. Note that if you develop any medical conditions during the policy term, they will either be taken as pre-existing conditions when re-applying for new term insurance, or you may be deemed uninsurable by underwriters.

Whole life insurance is a life-long protection scheme, as long as the premiums are paid. It's usually more expensive than term insurance. The primary advantage of whole life insurance is that termination or surrender of your policy may still entitle you to compensation. This is because whole life policies include a cash-value component. The primary objective of whole life insurance is to provide an insurance plus investment policy.

Note that much of your decision should depend on what best fits the stage of life you’re in, not just how much the premiums are. For example, term life insurance is likely more suitable if you’re younger, as lower premiums make budgeting easier. Term life insurance grants more freedom over how you invest the rest instead of locking it in an investment-linked policy. On the other hand, the enhanced freedom of choosing how you invest comes with the responsibility to actually do it. Just putting the money saved from the lower premium into a savings account, or worse, not using it wisely at all, is not the idea!

Critical Illness Insurance

The majority of conversations about insurance coverage revolve around health insurance (i.e. Hospital Plans) as well as traditional life insurance (payouts in the event of death). However, many people do not often stop to consider what cover they have in place if they contract a major life-threatening illness, should it not take their life, after they have left the hospital.

Critical illness (CI) coverage is a form of insurance that pays out upon diagnosis of a preset list of major illnesses, such as stroke, kidney failure, cancer etc. It is often divided into “early CI” and “late CI” coverage, which payout in the event of early-stage & late-stage diagnoses respectively.

Due to its importance and necessity, it is most commonly sold as a “rider” - which is a supplementary attachment - to a basic life insurance policy.

General Insurance

General insurance is to protect yourself and the assets you own. Your insurer will pay you in the form of an assured sum or agreed amount to cover the loss under certain circumstances. Examples include car insurance (compulsory insurance for damages to as well as caused by your vehicle), travel insurance (cost of inconveniences outside the resident country), pet insurance and property insurance (reimbursement for a variety of damages, i.e. theft). General insurance agents or broking staff of insurance brokers can sell general insurance.

Blue-eye Siamese cat — Photo by Nirzar Pangarkar on Unsplash

How to Take Out Insurance

Having *hopefully* learnt a lot about insurance throughout this article, you’re now wondering how much insurance coverage you’ll require in total. The definition of insurance coverage is the amount of money you or your dependents receive if you pass away or meet the criteria for other insurance clauses.

A work desk with a laptop, an open book with a pen placed in the middle, a mug and a vase of flower to the right of it — Photo by Nick Morrison on Unsplash

There are three recommended steps for calculating how much insurance you require:

Determine liabilities, which are debts or obligations you need to fulfil in the future. It can come in the form of money owed, goods needed to provide, or services required. Examples: mortgage, car loan, student loan, credit card bill.
Forecast expected living expenses in the case of an unexpected event. For example, having an accident at work and becoming disabled.
Assess the lump sum payments and monthly expenditures required after the unexpected accident, taking inflation into account. You should now be able to forecast how much you’d need to live for the 10, 20, and 50 years to follow. Consider what, if any, savings and investments you would have leftover in the case of an accident.

Ultimately, there is no one-size-fits-all amount of coverage. It will vary massively from person to person, which is why it's so important to speak with a professional.

But average protection needs are just estimates. Are you an average economically active person, with average income and average savings, with the average number of dependents... and are you the average age? Exactly... you do need to speak with a trusted professional! If you find yourself struggling to afford it, then it could well be budgeting issues you need to improve on.

Should I Use an Insurance Agent?

Scepticism can run high among people regarding engaging with an insurance agent or financial consultant. For them, it's a small but highly competitive market. Most agents are primarily paid on a commission basis with sales quotas to meet. Some agents may be tempted to push higher-commission products, whether suitable or not.

That said, there’s no doubt that a good agent will sell you the best policy for you, one that's affordable and gives you exactly the coverage you need when you need it. A good agent will cut through the jargon, explain complex products and help you know exactly what it is you’re getting. Given the complexity of identifying and matching needs with the almost infinite range of options out there, this is certainly not an easy task.

But even if you're dealing with an excellent insurance agent, you'll still need to equip yourself with some knowledge to make an informed decision. Doing this is particularly important when the sums are large, and the timeframe is long. Building a long-term relationship can certainly be a win-win for both with the right knowledge and a good agent who gives you solid advice. The agents will add real value to earn their commission. In return, you’ll get the protection you need in the context of your overall financial needs, even as your lifestyle, needs, and priorities change over time. Arm yourself by reading up on the products being offered by the agent.

Ask the right questions. For example:

Do I actually need this much coverage?
Is an ILP or WL suitable for my needs?
Does a 20+ year commitment make sense for me, or is it because agent commissions are higher?
Is there a promo going on for you to sell me this?
If you ask me to cancel an existing policy to take up a new one with you, do all the costs make sense to me?

And get this — while an ideal scenario would be to build a great long-term relationship, it’s okay to walk away from an agent to go elsewhere, no matter how much time they've just spent with you. There’s nothing to fear about speaking to insurance agents and financial consultants if you’re prepared to stay informed. Approach with an open mind, but be sure to read up about products before committing to any. And remember to ask many questions! A good agent will be more than happy to answer your queries.

Conclusion

As was suggested earlier in the article, 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. Besides, who would want to spend their investment earnings on medical expenses and liabilities that are otherwise easily covered for an affordable premium by your chosen insurance company? 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.

INSURANCE BASICS. COMPLETED. ✅

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Disclaimer

Content is intended to be used and must be used for informational purposes only and should not be relied upon as financial or other professional advice.