Tuesday, August 02, 2005

Life insurance - Basic (1)

We must understand what exactly insurance is for - it covers our financial losses arising from certain events. Nothing more.

And there are ONLY two kinds of financial losses
a. Extra expenses, i.e. medical expenses, repairing expenses, etc., money that you have to pay out of your pockets, and
b. Consequential loss, i.e. job loss, loss of income generating assets, etc. loss of future income

This is the 1st key concept that worth repeating. No matter what names are given to an insurance product, it essentially covers our
a. Extra expenses that we need to pay out of our pocket NOW, and/or
b. FUTURE income that will be lost and will no longer come into our pocket,
arising from certain unfavourable events.

Life insurance covers loss of FUTURE INCOME and its medical rider covers OUT OF POCKET IMMINENT extra expenses. Critical illness of a life insurance cover loss of FUTURE INCOME but medical insurance cover OUT OF POCKET EXPENSES.

Education fund insurance, life insurance for SARS, etc. are packaging. It varies the payments and claims mechanism (which include reasons of claim) to provide us essentially similar financial protection.

So, your child education insurance covers your loss of FUTURE income, just like any other simple life insurance. A life insurance for SARS , covers your loss of FUTURE income just like any other life insurance. Mortgage Reducing Term Assurance (MRTA) on your home loan repayment covers your loss of ability in generating FUTURE income (to pay back home loan), just like any other life insurance.

With this in mind, it is easy to cut through insurance speeches that don't make sense.

1 comment:

  1. Godd write up about the purpose of various types of insurance. But there's one correction I should mention here. Education fund insurance doesn't cover loss of future INCOME. It covers only the child's life and in the case of the parents buying additional rider to cover themselves from paying future premiums in the case of Death, TPD and Critical Illness.


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