Question and Answer on Universal Insurance

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.

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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