Growing up is all about making mistakes. When you were a kid, you learnt how to cycle by trying, falling and then trying again. A bulk of your knowledge came from failed experiences.
While making a mistake is an important part of growing up, there are some mistakes that you cannot afford to make. In particular, making financial mistakes involving insurance can have drastic unwanted consequences when you are old.
Here is a list of 7 common insurance blunders that young adults should avoid. Here’s an infographic, to start with:
1. Being under-insured and not realizing it
You are holding on to some insurance policies that either your parents have bought for you or have been recommended by your financial advisor friends. This means that you are not on the most extreme end of the insurance ownership spectrum. However, being the owner of a few insurance policies might put you in only a slightly better position than those who aren’t insured. This is because you might fall victim to under-insurance without realizing it.
How to be under-insured without realizing it?
Scenario 1: Insured for overlapping risks
You might fall into this category if you have a few insurance policies but they all cover the same type of risk. For illustration, let’s say you own four endowment policies and a whole life policy. While you might be in ownership of five insurance policies, they have overlapping coverage. To be more precise, all five insurance policies protect you against the contingent event of death. What happens if you fall sick or meet with an accident? You will not be able to claim against any of your insurance policies because they are life insurance, not health or personal accident insurance.
Scenario 2: Insured but insured amount isn’t adequate
What if you have already bought insurance policies that cover all the different risks (i.e. mortality, morbidity and accident)? Most probably you will not have this problem of under-insurance, right? No, you are still at risk of being under-insured.
Although you might have gotten all your risks covered by relevant insurance plans, the insured amount might not be adequate. For example, you have a personal accident insurance policy that covers you against disability or death. The amount of sum insured on your personal accident insurance policy is only S$50,000. However, based on your current income and financial obligations, you need S$200,000 coverage for a personal accident. While you are covered for disability risk, it isn’t adequate. In other words, you are under-insured.
Between the two scenarios, this is the more problematic one due to the fact that the problem is masked. The only time you will come to realize that it is a problem is when you start to make claims against your insurer.
2. Getting yourself over-insured
Getting yourself insured when you are young is a must. But sometimes you might fall into the pitfall of getting yourself over-insured, i.e. insuring yourself for more than what you need. You might be wondering, “Why is it bad to get yourself over-insured?”. After all, if getting yourself under-insured is a problem, then getting more insurance is a much better situation to be in, right? Well, not exactly.
Here’s a simple analogy that anyone can relate to. Over-insuring yourself is akin to buying more food when you are already full. There’s no harm in buying more food and leaving it aside. But why would you want to pay for something that you don’t need? Over-insurance is a waste of money that could have been better allocated to other financial assets for investment or savings.
3. Buying insurance before you need it
Another variation of the over-insurance mistake is to buy insurance before you need it. While you might hear from friends and experts that it is always better to buy insurance early, it doesn’t apply to every insurance type.
One classic example is life insurance. The purpose of buying life insurance is to put in financial safeguards for your dependants if any mishap happens to you. This is especially important if you are a breadwinner of the family. However, you might not have plans to get married or have children early. This means that you won’t have dependants at the early stage of your life. In such cases, you don’t have a need for life insurance. So, make sure you check if anyone will suffer financially if any mishap happens to you before going ahead to buy insurance.
4. Buying insurance on the obligation of friendship
When you are in the first few years of entering the workforce, you might find yourself in this situation. This is a much more common circumstance than you think.
One day, a long-time friend decides to call you up and ask you out for coffee. He/she then goes on to ask about your life before talking about your financial well-being. Soon, you realize that he/she has entered his/her ‘pitching’ mode. Your friend starts going into why you should be getting insurance and tries to convince you to buy from him/her. You end up being sold to support your friend.
If you find yourself in this situation, make sure you don’t make irrational decisions just to support your friend. No, we are not saying you cannot support your friend. Instead, you should do it in the right way, i.e. one that benefits both your friend and yourself. Don’t feel obligated to buy from him/her just because he/she is your friend. You need to make sure that the insurance policy your friend is trying to sell you suits your insurance needs.
5. Not shopping around for the best deal
We always make price comparisons for whatever we are planning to buy, be it home appliances, electronics or mobile devices. However, when it comes to insurance, not everyone does the price comparison diligently despite the importance of insurance in any individual’s financial portfolio.
But here’s the thing. Shopping for an insurance policy is not like shopping for anything else. It involves a lot of financial considerations. Furthermore, comparing insurance plans can be challenging due to the nature of how insurance plans are sold, i.e. through agents. In order to shop around, you will need to meet up with a few insurance agents. This can be time-consuming. Not to mention, comparing insurance policies isn’t easy, especially if you don’t have a financial background.
Luckily for you and I, Monetary Authority of Singapore (MAS) also realized this trend amongst consumers. Thus, the CompareFirst website was launched to facilitate easier price comparison across different private insurers. Through CompareFirst, you will be able to compare across similar insurance products without being overwhelmed by information.
6. Thinking about investments before getting yourself protected
Insurance is meant to offer you financial protection against a possible contingency/event in life. But it is increasingly common for insurance to come with some elements of investing. This often confuses young adults and mislead them into thinking about investments before protection. Unfortunately, the peril of this blunder can have serious financial consequences.
Imagine if you focus your financial portfolio only on investments. What happens if you meet with an accident and require cash to pay for a surgery? Selling your investment is one possible way. But what if the stock market is currently bearish and the value of your investment is affected? You have no choice but to sell your investments at a loss to cover your surgical costs.
A surefire way to avoid making this mistake is to think about insurance before you consider investments. Make sure that your wealth is protected before you think about growing it.
Check out Insurance or Investment – Which Should You Get First? on the types of basic insurance coverages, you need before you consider investments.
7. Buying insurance and forgetting to review it
An insurance policy is often bought and forgotten until a mishap happens. The moment you sign on the dotted line to buy the insurance is likely to be the second last time you see the document for most people. (The last time being the time when you need to claim against your insurer).
However, many life events can occur throughout your lifetime that can warrant a review of your insurance policies. Life events such as marriage, having a newborn or committing to a new house should trigger a review of your insurance policies to determine if you require more coverage (in terms of sum assured or coverage against more mishaps). In addition, when your insurance policy matures, you need to decide whether to renew or replace it.
Generally, 1-3 years is a good time for reviewing and updating insurance policies. It is wise to always arrange for a timely review of your insurance portfolio with your financial advisor when the time is right. Responsible financial advisors will also check in with you periodically to understand whether there are any changes in your life stage. But it is always more prudent to take this responsibility upon yourself and not just on your financial advisor.
You may also like: