Beat the fine print in insurance

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Education

Heard stories about how individuals spent a fortune paying insurance premiums and had their claims rejected? Many could have been prevented by understanding the key insurance terms in a policy. Help’s here as we put into plain words some of these common insurance terms.

Brandan Chen

Financial Planner

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We've all read stories about how individuals spent thousands of dollars paying insurance premiums and had their claims rejected due to a misunderstanding of insurance terms and jargon. While you may have tried flipping open that thick policy booklet and started reading line by line, you’d soon meet with some of these terms that you’ve never heard of in your life. Help’s here as we put into plain words some of these common insurance terms.

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01

Material misrepresentation

To put it simply, it is the concealment of a fact. You know how it is important that we declare any health conditions we might have before getting a health insurance? Take for instance, Eileen, a 35-year old lady, has been diagnosed with ovarian cysts. The doctor had told her that it is a common condition among women of her age and that there is nothing to worry about. Since it isn’t anything major, she did not declare the condition to her insurer when purchasing a health insurance. Now, that’s material misrepresentation, and she’d probably have problems with her claims if the ovarian cysts develop into a more serious condition that requires surgery. The insurance policy will be void if the insurer finds that the policyholder has withheld certain facts.

02

Total Permanent Disability (TPD)

The term will most likely appear in a life insurance policy, where a payout is common if the assured meets with an unfortunate incident that causes him or her to be permanently disabled. Take note that the keyword here is total, which means more than just impairment. This usually means the assured is unable to perform any work to earn a living and that the condition persists for more than 6 months. Different insurers may define TPD differently, so do check through the policy and ask your adviser to understand what it exactly means.

03

Critical illness (CI)

The Life Insurance Association of Singapore has published a list of standard definition for 37 critical illnesses, including detailed description of each critical illness. What may complicate matters is that it is common for insurers to also offer “early-stage” critical illness policies, which provide different coverage from traditional critical illness policies that usually only include severe-stage illness. Early CI policies seek to bridge the gap where one has only been diagnosed at an early stage of the critical illness, and can sometimes allow for multiple claims following relapses or/and a lump sum payment for early diagnosis.

Again, definitions differ between the various providers, so it is important to understand at which stage claims can be made.

04

Participating policies

Participating policies are life insurance policies that provide cash benefits. Typically, part of the premiums you pay are pooled together with those of others and are used in a fund to generate investment returns. The participating fund then pays out cash to the policyholders in the form of benefits.

The aim of a participating policy is to provide stable returns over the long-term. Do note that these benefits typically consist of both guaranteed and non-guaranteed components. By having both components, the policyholder will be able to secure guaranteed benefits with the potential of increasing returns on the non-guaranteed components. Participating policies can be found in savings/endowment plans, such as the Manulife ReadyPayout Plus.

05

Bonus

Bonuses are non-guaranteed benefits and are usually separated into annual reversionary bonuses and terminal bonuses. Reversionary bonus is an annual bonus that increases the guaranteed benefits of the policy. On the other hand, terminal bonus is only paid out upon the maturity of the policy or on a death claim. While bonuses are non-guaranteed, they are confirmed if they have been declared by the insurer.

The amount of bonus declared annually depends upon the performance of the insurer’s participating fund, which in turn is a result of returns earned on the investments.

06

Investment-linked Product (ILP)

ILP is a type of life insurance that uses a component of your monthly premiums to purchase units in an investment-linked fund. The advantage of getting an ILP is that it allows one to combine life protection with the potential of accumulating wealth with professionally-managed funds. For instance, Manulife’s InvestReady allows investors to fully invest their funds from day 1 with zero sales charge, as well as enjoy free fund switching so that you can respond to market trends and select the funds that reflect current investment sentiments.

07

Endowment Policy

There are those who may be more risk-averse when it comes to investments and would rather use savings as a way to accumulate wealth. This group of individuals can benefit from an endowment policy, which is essentially a long-term savings plan with life protection included. Endowment policies typically pay out a higher interest rate compared to what you can get from a bank savings account, with the added benefit of receiving annual income payouts and potentially higher returns with non-guaranteed benefits.

08

Deductible

Before you make an insurance claim, a minimum amount called the deductible will have to be paid before the insurer will approve your claims. So for example, if your hospitalisation bills came up to $5,000 and it is stated that you need to pay a deductible of 10%, you will have to fork out $500 before you can claim the remaining $4,500 from your insurer. If you want your deductibles to be covered as well, you may want to explore add-on rider policies that may help you cover all expenses.

09

Income Benefit

When you take up a health insurance, you may have the idea that the insurance policy will likely cover the total or part of the medical fees you’d need to pay for your hospitalisation stays or treatments. Some policies provide an additional income benefit, which is essentially a cash amount paid on a daily/weekly basis to make up for the income lost while the policyholder is unable to work.

10

Annuity

An annuity is a type of life insurance policy which is used mainly to finance a regular stream of income during one’s retirement. This regular income payment helps to provide financial stability during a time where you may no longer be working and to prevent outliving your savings. Some annuity/retirement plans like RetireReady allow for flexibility when it comes to withdrawing funds so that the policyholder can choose to either use the funds for emergencies or accumulate them for higher returns.

11

Surrender

In insurance jargon, to surrender a policy means to terminate it. There may be many reasons one would surrender an insurance policy, but there should always be substantial consideration involved since you would likely lose much of the benefits and may not get the same level of protection for future policies.

Understanding insurance jargon is never easy since most of the terms are seldom heard of in our daily lives. However, they can greatly affect the policies that we end up purchasing or the claiming process. Is it thus advisable to ultimately speak to a certified advisor so that a needs-based analysis can be duly done and that you get the most suitable policies according to your lifestyle and aspirations. Arm yourself with this list and start your planning here!

Disclaimer:

This advertisement has not been reviewed by the Monetary Authority of Singapore. The information in this article does not necessarily reflect the views of Manulife (Singapore) Pte. Ltd. All stated information, including external links, are general information and does not constitute or form any recommendation of insurance plan. Certain information in this article may be taken from external sources, which we consider reliable. We do not represent that this information is accurate or complete and should not be relied upon as such.

This article is for your information only and does not consider your specific investment objectives, financial situation or needs. We recommend that you seek advice from a Manulife Financial Consultant before making a commitment to purchase a policy.