As a millennial myself, I can relate to the situation where our first insurance policy was purchased when we started our first job. Perhaps our parents might have enrolled us for our first policy.
Many of us stop there, while a few would sign up for more policies along the way because someone we knew reached out to us or were referred by friends or colleagues. Nowadays it is common to hear the standard response of “We already have sufficient insurance coverage, thank you” when approached by an agent, to deflect unsolicited sales attempts.
There are those who rely on third party coverage such as staff benefits offered by employers. However, this might give us a false sense of security because these benefits are lost the moment we leave employment.
This taking-it-easy attitude might go on until one day, when a claim is finally made, then the often-heard comment would be “I should have increased my insurance coverage” instead.
It is a fact that many of us tend to focus on growing our income, constantly upgrading our lifestyle while playing many roles in our daily lives to make ends meet. Insurance protection is often relegated to the near bottom of our list of priorities because its urgency is less felt compared to more pressing commitments.
Along the way, we may have lost contact with our existing insurance agent, or our agent friend might have left the industry. In the end, we are not aware of where we stand in terms of wealth protection.
At a younger age when we are still healthy, we can easily get our policy proposals approved as standard coverage. However, as we age, we are at higher risk of being diagnosed with medical conditions, thereby increasing the chance of having our proposals declined or with added loading.
Therefore, as the New Year approaches, I would like to share some thoughts on why you should review your policies and give you some ideas on how to deal with your existing policy with special conditions imposed.
Firstly, let’s go back to basics. Insurance is all about transferring the risk of a potential loss to the insurance company in exchange for a fee called the insurance premium. This is a simple example of financial risk management.
We often work closely with our clients to educate them about how major changes in their financial position might be a good indicator that an insurance policy review is due. This is to ensure that their financial risk management is aligned to their current situation. These changes occur due to life events such as:
– Getting married, separated or divorced;
– Welcoming a new born to the family;
– Changing jobs or starting your own business;
– Increased financial commitments due to aging parents, children with special needs or personal debts; or
– Nearing retirement age.
When we are not in alignment with our life stage growth, we are putting ourselves and our family at risk. This means that we may only be partially transferring our risk to the insurer, thereby having to bear the weight of self-insuring the remaining gap with our hard-earned savings and accumulated assets.
In the worst-case scenario, an unforeseen accident or unpredictable major sickness may lead to death, causing a life changing event for those left behind.
Irrespective of your life stage, we have come to recognise five key areas in risk management and insurance planning that everyone should consider:
(a) Life Coverage – to support dependent family’s income when we are no longer around to minimise the impact on their lifestyle and pay off debt;
(b) Total Permanent Disability Coverage – to replace our income in the event we are permanently disabled;
(c) Medical Card Coverage – to cover hospitalisation and surgical costs;
(d) Critical Illness Coverage – to support our living costs and health maintenance during our treatment and the recovery period, and lastly
(e) Personal Accident Coverage – to provide financial support in the event of accidents.
These areas are equally important as they serve different purposes at different life stages. For instance, a fresh graduate might not require high life coverage compared to a father with a dependent child.
Meanwhile a retiree can consider reducing her life coverage after settling all her financial commitments and instead focus on ensuring that her hospitalisation and surgical benefits are sufficient and sustainable in her golden years.
Inflation is another reason we need to do a regular policy review. A rise in the price of goods and services reduces our purchasing power over time. Medical inflation is particularly high, ranging between 10%-15% annually. Thus, it is important to ensure our coverage is sufficient and can keep up with the current cost of living and health care.
For those with investment linked plans, we need to know how long our coverage is expected to last based on the premium that we are paying. The sustainability of the policy is crucial to ensure that we continue to enjoy the coverage until the desired age.
It is possible that sustainability of the policy will decline, resulting in policy lapsation due to the increase in the cost of insurance over the years. Hence, with Bank Negara Malaysia’s effort, policy holders will now receive an annual statement from the insurer providing information on sustainability of their policies.
First, retrieve the hardcopy policy or sign-up for access to the customer portal with your insurer. And then, prepare a summary of benefits table based on the details of each policy.
You can either do this on your own or consider engaging someone to assist you. Your existing agent is usually the default person in a position to do so.
Nevertheless, if the agent is no longer in the business, you can opt for the insurer to assign another servicing agent or alternatively you can engage the services of a Licensed Financial Planner.
Concurrently, it is good to work out your latest cash flow and net worth position so that you can determine if the existing policies meets your current financial needs or if there are gaps that need to be addressed.
In some cases, the insurer would accept your proposal but not on standard terms. The insurer may impose special terms on your policy to reduce the perceived risk due to your pre-existing health conditions.
For special terms imposed, we encourage clients to write an appeal letter to request that the insurer reviews the special terms imposed if there are no recurrences of the medical condition for over 3-5 years.
I have had clients who were successful in their appeal and had the special terms removed. To do this, the client would need to undergo a Medical Examination and health test at their own cost. Clients who go for regular check-ups can also include the reports together as supporting documents. Certain conditions might need a longer duration for the client to justify the appeal, while other exclusions may remain.
As Licensed Financial Planners practising holistic financial planning, we aim to offer clients independent advice and options in their best interest. We aspire to educate our clients on financial literacy as we grow with them in their financial journey.
It is always valuable to get a second opinion if you are uncertain about your financial situation, because no one is responsible for your financial wellbeing except for you. As such I encourage all of us to do insurance coverage spring cleaning to ensure that our wealth protection strategy remains relevant in 2021 and beyond.
First published in Smart Investor 01/02, 2021 Issue
Licensed Financial Planner with Finwealth Management Sdn Bhd