When someone mentions “insurance”, an image that comes to mind is this well dressed fellow who is annoyingly persistent and wouldn’t take “no” for an answer. It is not a fun subject to talk about and might not be an enviable job especially when compared to a cushy, super-secure job in the Bruneian public sector. But amongst many who chase the commissions there are quite a number who do try to educate the masses. What’s the point of buying insurance policies anyway? Aren’t they just money sucking products which do nothing for you? Short answer for the latter is “No”.
For the past few weeks I’ve been discussing topics on creating a foundation from where we could build up our wealth. Things like saving up for a purpose, budgeting to not spend all your money and investing for your future nest eggs are very important but they require 2 key things: you being alive and you being healthy. The undeniable truth is if you’re dead all your worldly possessions will be passed onwards or if you were badly sick, your focus would be recovery instead of making money.
In this game of life, we are dealt different hands; circumstances that shape our view of the world. Those dealt the worst are people in their prime who meet with an unexpected demise, terminal illness or severe accident. The kicker is that no one knows what hands we’re dealt until the last possible moment. So what can you do to protect against these odds?
First of all, let’s start with some words commonly thrown around when talking about insurance. When I was first introduced to insurance, I was utterly confused at the words they used. Some words suddenly have new meanings tagged to the insurance world. Therefore, to ease the understanding, here are some terms frequently used:
- The person who holds the contract with the insurance company.
- The amount paid by the policyholder to maintain the contract.
- The person whom the payout from an insurance policy goes to.
- Conditions against which the insured person is covered against. This may be Death, Critical Illness, Total & Permanent Disability, Medical fees and many more.
5. Sum Assured
- The amount the insurance company pledges to pay out when conditions are met.
6. Critical Illness
- Certain serious illnesses which causes a person to become unable to earn an income. Illnesses covered may differ between insurance companies.
7. Total & Permanent Disability
- A physical condition or disability which results in a person becoming unable to earn an income. Conditions may differ between insurance companies.
- When an insurance policy contract is terminated due to certain conditions. Usually due to non-payment of premiums.
- The date when a policy “ends” and usually with a payout.
- An add-on to your insurance policy to increase it’s coverage or benefits.
What is insurance?
An insurance policy is basically a contract between you as a policyholder and the insurance company. Entering this contract, you agree to pay a premium and the company pledges to compensate you or your beneficiaries if any of the conditions (e.g. death) are met.
For example, we have Sam Mitch who pays a premium of $1,000 per year is insured $350,000 for life insurance. If Sam accidentally fell in front of a train and dies, the company will pay out $350,000 to his beneficiary.
There is a wide array of insurance products offered on the market namely:
- Critical Illness (CI)
- Total & Permanent Disability (TPD)
For the purpose of this post, we will cover mostly on life insurance.
Types of life insurance
There are many types of life insurance but in a nutshell, life insurance can be broken down into two main types:
- Term life insurance
- Whole life insurance
A term life insurance gives you a death benefit for a fixed number of years: 5, 10, 20, etc. Once the term is over, you stop paying premiums but your coverage also ends. If you die at any time during the term, your beneficiaries get the death benefit payout. But if you die after the term, they will get nothing.
Usually term life insurance do not have a payout at maturity. However, they may be packaged to have a savings-like benefit added on.
Like the name suggests, a whole life insurance policy covers you for your whole life. This may be subject to terms such as a limit of 100 years of age.
In addition to providing a death benefit, a whole life insurance policy also usually accumulates cash value that grows by a certain amount each year.
Generally whole life insurance will be more expensive than term because of all the additional benefits they provide.
So how much are you worth?
Let’s take a moment and reflect a little. Picture yourself and ask, “How much am I worth right now?” Some with confidence will value themselves very highly while others may undervalue themselves. Then there are those in between. Next, do you have that amount which you tagged yourself with? In your savings account, perhaps? Or in the form of assets after deducting all your debts. More often than not, the harsh reality is that individuals have more debts than assets. And if something were to happen to them, those limited assets may be liquidated just to pay off their debts!
Let’s take a few minutes to calculate your net worth:
Assets = All tangible items under your name. Including house, car, your Gucci bag, anything worth money now.
Liabilities = All debts you have. Including car loans, mortgages, credit cards and other things.
Net worth = Assets – Liabilities
This will show you how much value you have now. This is the amount that will go to your beneficiaries if something were to happen to you. If your net worth is in the negative, you will leave behind your debts; not something nice to leave your loved ones with, right? In this case, it’s probably better to leave nothing than leaving debts for them.
So what’s the point of insurance?
The purpose of insurance is predominantly to protect 2 things:
- You, and
- Your loved ones.
“But… Protect against what?” you might ask. You see, even the most advanced medical technology will not let you live forever. So here we’re talking about protection against lifestyle depreciation; the depressing need to lower your standard of living. If you lost your job right now, will you be able to maintain you and your family’s lifestyle? What if this job loss was indefinite? This is the condition that your demise or incapacitation thrusts on them.
If you were to kick the bucket, not only will your family lose a loved one, but they also (potentially) lose a breadwinner and take on all debts accrued. And if you are fortunate enough to survive an incident but were to be left incapable, you will then become a dependent on top of all the above. Dependency on others also comes from suffering from a critical illness such as advanced cancer.
Therefore, what insurance does is it gives you and/or the people you care about the peace of mind to continue with life. It aims to give you a financial safety net if the worst does happen. The risk here is loss of a livelihood and insurance is meant to mitigate that risk.
Insurance is used to cover your:
- children’s education expenses. (This may also be in a form of a savings policy for your children)
- spouse and/or dependent’s living expenses.
- own funeral.
- final donation to a charity or cause you believe in.
- lifestyle in the case of being unable to work due to illness or disability.
How much do you need?
It probably goes without saying that everybody has different requirements for insurance. How do you know how much you need? The calculation insuring against loss of life is more or less similar to CI and TPD:
- Find out how much you’re spending monthly. This is where your budgeting data comes in handy.
- Multiply your spending by 12 (months).
- Multiply again by number of years required to sustain the lifestyle.
Doing this should tell you roughly how much coverage you should look at.
Example: So our friend from earlier, Sam Mitch, has a wife and a 2-year old son. He spends $3,000 a month on necessities and paying his mortgage. Assuming he wants to support his family until his son reaches 18 years old which will be for another 16 years, the calculations will be:
$3,000 x 12 (months) x 16 (years) = $576,000
This calculation is applicable if he wants to insure against CI or TPD as well. Bearing in mind, the amount may be higher considering he will lose the chance to increase his income through promotions and has not factored in potential inflation in the future. Also this calculation accounts for only living expenses; what if Sam wanted to pay for his son’s wedding or University?
Insurance in Brunei
The big name companies in Brunei which provide insurance services are:
To get a more accurate analysis of how much you need, it is best to find an authorised and reputable vendor for insurance policies. In Brunei, the majority is through an agency force where the agents sell and service your policies. These agents should be able to:
- Find out what you need.
- Calculate how much you need.
- Propose different policies matching your needs.
- Explain the benefits of the policies.
- Be available to answer any queries.
I’m sure many of us have heard stories about how agents trick people to benefit themselves by selling high commission policies regardless of the buyers’ needs. That being said, there are good agents out there. These are people who do not “hit-and-run”. Meaning they don’t disappear after selling to you nor do they take advantage of your lack of understanding. They should and will take the time to assist you as much as possible. Regardless, you should ask as many questions as possible; Why does it suit you? How much do you have to pay? Are there better alternatives? If there are any doubts, the agent should be able to dispel it.
One important point to note is if you have any sort of medical condition, be sure to declare it when you buy a policy. Failure to do so may result in you or your beneficiary’s claims in the future being rejected!
Insurance is quite a broad topic, to be honest. So far I’ve only covered some very basic things about life insurance and that’s just the tip of the iceberg! The take home message is this: If you have someone you care about, do consider being insured for their sake. Also, life insurance is cheaper when you buy it at a younger age. Fortunately, this was not one of the mistakes I made during my early working years and I have sufficient coverage for now. But as always, improvements could be made. Let me leave you with these contradicting quotes:
“Getting life insurance is like making a bet you can’t win. If you live, you don’t get the money. If you die, you don’t get to enjoy the money.”
― Oliver Gaspirtz
“I don’t call it “Life Insurance,” I call it “Love Insurance.” We buy it because we want to leave a legacy for those we love.”
― Farshad Asl
Because at the end of the day, if you buy life insurance, it’s never about you.