Friday, July 18, 2008

Paying the right price

Many people are worried about suffering from a critical illness. The insurance agent scare them about the high cost of this event.

Let us take this example. The chance of making a critical illness claim before 65 is probably 10%. The average cost of the illness is $50,000. You should pay a total premium of only $5,000 to cover this risk. Allowing for interest earned from investing your premium, your actual could be much lower, say $2,000, spread over many years.

But, you are asked to pay a premium that is 5 to 10 times of the actual cost, say $10,000 to $20,000. Why should you pay so much? Why should it be so costly?

Although some part of the premium is returned to you as a cash value, the yield is so low. It takes up to 20 years just to break even. The selling expenses and profit margin of the insurance company are too high.

It is better to buy a short term cover for critical illness and pay the right price for it. You can invest the rest of your savings in a low cost investment fund. After 20 years, your savings will be more than the sum assured. You do not need any critical illness cover at that time, as it can be paid from your savings.
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4 comments:

Crafty Craken said...

http://www.cancer.org/downloads/AA/CancerAtlas10.pdf
is an interesting link. It says that the probability of getting cancer before age 65 in Singapore is 10-12.4%.

However, one thing to keep in mind, is that the risk of getting cancer increases as you age.

Your estimate of critical illness may be a bit low, but cancer is the major cause of critical illness, and 10% probably isn't a bad rule of thumb, but shouldn't be taken as an absolute number.

July 18, 2008 8:50 AM
Tan Kin Lian said...

Hi Jill,

Can you check the proportion of critical illness policies that are paid as a claim in each year? I suspect that it is 0.3%. So, if a person insures for 30 years, the proportion that makes a claim is 10%.

However, my figure is just a guess. You should be able to get access to more reliable figures.

July 18, 2008 11:14 AM
mfonet said...

if one has dependents, should we then consider buying short term coverage till we retire? It is unbelievable with the high premiums charged by insurance companies.

What are the low cost investment funds available in the market?

July 18, 2008 4:31 PM
SingaSoft said...

you might want to consider NTUC Income LUV plan. I think it is a good product that might meet the criteria mentioned.

July 18, 2008 8:44 PM

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