I have written a few articles about insurance, one which was triggered because I lost my bag on a plane early last year. In these articles, I covered what insurance is and how excess works on short term insurance. Today I would like to bring one important aspect of insurance. It’s non cumulative in nature.
Yesterday my broker called offering me a new product. He explained that they are discontinuing the sale of the existing product and are offering a new product. Under the old product, the main key features were:
- My cover was subject to a 5% annual increase
- It was a life time contribution
- And it has future debt cover
The new product although similar in nature is slightly different in a sense that it:
1. Has a cap on contribution. One is only contributing until retirement. An important element due to the fact that when you retire you are unlikely to have a higher income and thus may not afford to carry on with the premium. What is important to note here is that, if you stop contributing in the mist of the your lifetime, you loose the benefits no matter how many years you’ve paid. This is indeed a good benefit introduced. But since they are taking a risk that you might live longer than anticipated, you will need to pay a slightly higher premium to compensate them for this risk.
2. The second benefit is that of a cash back. Every 5 years, you will be getting money back from the insurance if you are still alive. The benefit with the life cover is that it only pay out in an event of your death. So it’s a future investment for those that you’ll leave behind in an event of your death. Therefore having the option to receive some of your money back whilst you’re still alive may encourage people to view it as an investment option too.
As for me, I am definitely considering the new cover as there is nothing to loose and I have more benefit when compared to the current cover. The only issue with changing covers is that you need to re-do blood tests that you would have done when you enter in the first contract, which if your lifestyle has changed may increase your risk profile which might increase your premium.
After consultations with my fiancé, we actually reached a conclusion that even if the new cover is better than the old one, it comes at a high premium and since my lifestyle has not changed since the old cover, and with other commitments already in the pipeline, it’s best I stay on my old cover. We will re-look into it early next year when we are planning a family and maybe increase the cover to include future kids if possible and update the beneficiary list.
In conclusion, insurance contracts are not investments. If the insured event does not happen or you terminate the contract before the insured event, you loose all your contributions. In addition, products will always be upgraded and sound better so really evaluated whether its worth changing or not. Know the difference between insurance and investment to avoid disappointments many years down the line.