Wednesday, October 10, 2012

Money Matters: Insurance for YOUths

Money Matters is a short series of articles written by Ho Khin Wai, a Diploma in Banking and Financial Services student, in an effort to raise the level of financial literacy among NYP students. He will cover various relevant topics on personal finance for teenagers in Singapore, and strives to make these articles fun and easy to understand.

The world of insurance is unbelievably confusing. It doesn’t help that it is also an aggressively marketed industry, does it?

You probably know a thing or two about insurance so I won’t delve into the boring definitions of insurance. What I would like to highlight today is what kind of insurance, you, as a tertiary student/young adult will probably need.

However, don’t take my advice wholesale. Just like scrutinizing a policy recommendation by an insurer, I strongly encourage you to critically think about the types of policy covers mentioned here and what you really need. Different people have different needs. Think of the different plans offered by the insurance companies and get the best deal for your dollar.

Term Life and Whole Life/Universal Life Insurance

Mr Tan Kin Lian said this in his blog, and I agree to this opinion: “Life insurance is needed when a person has financial commitments, e.g. a family with dependent children, and needs to provide for their financial security in the event of premature death. A young person who is not yet married does not have this commitment. The priority is to accumulate and invest savings that may be needed in the future.”

Students like us may not need life insurance yet. This policy however, is a must-have for people who are married and have children of their own. However, if you still feel better getting one, read on.

The deliberative question is: Term Life or Whole Life? A Term Life cover is an insurance cover for only a specific period of time (e.g. 30 years), whereas a Whole Life cover covers you for your entire life. However, that means paying high premiums (monthly payments) your whole life as well.

There are advantages to consider for both types of insurance.

My personal preference is Term Life cover. A great American personal finance guru, Suze Orman, had advised that with term insurance, you can get the highest protection paying much lower premiums than if you were to get Whole Life Insurance.  If you opt for Term Life, it would be ideal to choose one with a longer protection period, and one which guarantees you renewal regardless of your health conditions.  You should also opt for one which offers protection over critical illnesses.  We may be young and fit now, but as we grow older, more illnesses may strike us, including critical illnesses. So it is wise to take up a policy which covers you for such situations.

If you opt for Term Life cover, you can even channel the funds you saved from the lower premiums to other investments with higher returns such as real estate, stocks, and bonds. However, do so only if you are financially savvy and have a sound understanding of investment.

What about Whole Life Insurance? For young people who are generally healthy, Whole Life Insurance may also be attractive because of its relatively low premiums. This type of insurance is useful for young people who do not have much financial knowledge but want a fuss-free way of having insurance coverage with a savings element. Remember that if you opt for this type of insurance, it is better to try to attain coverage for critical illnesses.

To sum up, do get an understanding of your risk profile, protection needs and your ability to manage your investments before determining which type of insurance to go for.

Health/Medical Insurance

Students like us are bound by the constant pressure to excel in our studies. Sometimes, we neglect our health and fall sick. As you know, the cost of healthcare is still rising although the Government is trying to keep healthcare affordable. What happens if you get really sick and require medical examinations, and have to undergo surgery or even be warded in the hospital?

The financial burden is on your parents. Yes, they can pay your medical bills using their own Medisave or Medishield, but what if they have used most of the money in these schemes for their own previous illnesses? Or, they might need this amount as protection against any future illness.

Health insurance comes in as a financial lifesaver in these difficult situations. The policy covers most if not all of your hospitalisation expenses, as well as surgeries, lab tests and certain outpatient treatments.

Health insurance is relatively cheap between the ages of 17 to 29, where premiums linger a bit over $100 per year. You may ask your parents to effect a health insurance on you, so that they pay for the premiums (usually through Medisave, so no out-of-pocket cash is needed) but you enjoy the benefits when needed.

Moreover, I would recommend adding a rider that covers you for deductibles and co-insurance. These are additional costs that you have to pay by yourself before the insurance company pays for the bills, and they usually are in a few thousand, depending on how large your bill is. Hence, get the rider if possible.

Personal Accident Insurance

Life is full of twists and turns. Accidents can happen at any time, anywhere and to anyone. As teenagers, we need to protect ourselves financially as this is the time when we are most active, and most prone to accidents, big or small.

Even a small elbow joint dislocation during a basketball match may bring about quite a large medical bill. A personal accident policy can help ease some of the financial burden of paying those bills. The best thing is that personal accident policies are very affordable.

A personal accident insurance complements both your life policy and health policy. It covers you for disability, injury or death due to accidents, and may include accidental medical reimbursement and A&E charges, which a life policy may not cover. Moreover, a personal accident policy usually pays out as a lump sum, while health policies only cover the actual cost of treatment.

Educational institutions such as NYP automatically insure all students for personal accidents under the Group Personal Accident Insurance Scheme (GPAI). You can find out more about the coverage here. As you enter the working world, there are also similar policies for employees which you can take advantage of.

Of course, there are other types of insurance such as auto (car) insurance that may be applicable to students who are drivers, or professional indemnity insurance for students going on to work as a doctor, nurse, or any other specialisation.

In essence, you should not have to pay a hefty price for protection. Paying a thousand or more in premiums does not make financial sense to me. So before you fill in the application form at an insurance roadshow promising to offer you a free umbrella or other goodies, be sure to do adequate homework and pick out what is really essential.

Khin Wai is an NYP Year 2 Banking and Financial Services student from School of Business Management (SBM). He started writing for NYP Portal in 2011 out of interest and was soon "addicted" to it. He has also written book reviews for Straits Times YA Classified. Besides writing, he loves singing and has performed for various events in NYP under NYP Soundcard

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