Strange that overpaying can be a problem
A potentially big one at that.
Genetically speaking, our Singaporean DNA contains the strongest strands of deal-seeking urges (colloquially known as finding lobangs) ever found in humankind. (source: trust me, bro)
Why else would there be immense crowds during computer expos? (at the Singapore Expo, naturally)
It explains the huge popularity of the $1 chicken rice when it first came out (is it still a thing these days?)
Even a study (albeit informal) indicates that 55% of Singaporeans love to haggle for a discount.
So it does seem ironic that while Singaporeans will do their utmost best to secure a discounted handphone, they adopt a cavalier approach towards one of the most important purchases that can ever be made.
For a regular Joe paying around two thousand a year for insurance, just a 10% reduction in premiums amounts to $200 in savings. Enough for a new phone after a while, no?
Hold up, what constitutes overpaying for Insurance?
Since the Brittanica is silent on the matter, here is our definition:
Paying the same amount and getting a lower coverage amount, compared to what’s available
Paying the same amount and enjoying a smaller scope of cover, compared to what’s available
The converse for both also holds true, but we see no need in repetition. And just so we can throw in a bit of Latin, the assumption we make is ceteris paribus.
How does one overpay for Insurance?
Not on purpose, for sure.
The majority of us purchase our policies with similar intent: to obtain financial protection, just like any fiscally responsible adult.
Yet inadvertently, these are the 3 ways that Joe doesn’t get full value of coverage for the money he pays:
Method 1: Holding on to policies that are outdated**
Some policies may have been bought many years ago, and these policies that come with older clauses might not be as advantageous as the current options out there. Assuming one is still eligible to purchase insurance, simply holding on to the older policy is overpaying – since there are free “upgrades” to be had.
**Yes, we heard you at the back protesting loudly – aren’t policies meant to be kept for a long time? Yes they are, but assuming that Joe can get a better policy by paying the same amount of money (his health condition is unchanged), he can be better served by at least exploring what options are available to him.
This is where your financial advisor comes in. He or she can tell you what is feasible – or not. Cash value accumulation, age considerations, financial/medical underwriting are some of the factors that come into play.
Method 2: Not updating insurers about improved health status
Policies are priced according to one’s health conditions or lifestyle factors – the presence of existing or current illnesses, or if you are a smoker.
If Joe bought say, a Whole Life Plan years ago and was smoking at the time (declared accordingly in the proposal forms), he would be paying premiums priced for smokers. Should he subsequently quit smoking, he can inform the insurer of his newfound status and seek a review for his premiums to be repriced (lower, of course!)
Should the converse happen… Joe is simply too busy to do anything >_<
Method 3. Not comparing plans before purchase
Similar to handphones, some insurance policies can be thought of as commodities, with little variance between features and coverage, especially with term plans. The premium difference between plans from various insurers can vary from 5 – 30%, so there had better be a really good argument at hand to justify that extra high sticker price.
Without proper oversight, your policies may also overlap in coverage, which leads you to pay twice for something that you may only claim once (generally for indemnity based policies).
That being said, it is quite ok to pay more for something, provided you do it with your eyes wide open. A number of plans are also not that conducive to comparison, as their features are bespoke and not quite the same across each insurer.
But overpaying… can be a good thing
Because… in order to overpay for insurance, you either have to already buy it or at least be in the process of purchasing it.
Compared to someone else blissfully unaware of how financially fragile they are with adequate coverage, we argue that overpaying is a better position than not paying.
In the nonpaying case, there could also be a danger of not being able to buy what you need… when you need it the most. We sum up that scenario aptly with the picture below:
To part ways till our next article, let’s end off with another lame aeroplane/parachute joke:
Would you actually jump off a plane without a parachute?
Yes, provided the plane is parked on the ground.
See? Context matters.
For all other insurance-related stuff, check in with your financial advisor regularly. Or just read our stuff, we post gems and memes in copious quantities.
Till next time!
www.ClearlySurely.com aims to eradicate the knowledge gap between consumers and Life Insurance. Our Vision is that one day, every Man, Woman, and Child will be properly insured.
We are also in the midst of building a top-secret new platform that will change the way people view financial planning. PS. It does not contain lame hyperboles like “fintech” or “insurtech” or “machine-learning” or “AI”.