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Mitigating financial risk with appropriate insurance

15 Jan 2021

Accidents often happen when we least expect them and can cause significant financial stress. This highlights the importance of purchasing appropriate insurance coverage, which can provide protection against unexpected contingencies, as well as understanding the different types of insurance.

1. Savings insurance vs. protection insurance

Insurance products can generally be categorised into savings insurance and protection insurance. Savings insurance plans generate returns from what the insured pays as a premium. In savings insurance, the premium payment term is usually longer, and some products offer accident or death benefits. Popular products in this category include life insurance, savings insurance and annuities.

Protection insurance generally offers protection against accidents without savings or investment components. The insured is covered only for sudden risks happening during a specific period (usually a year). If no incidents happen during the coverage period, the insured gets nothing. The premium is not returned. For protection in the future, one has to renew the policy annually.

There is a vast array of insurance products on the market. While some insurance companies offer even tailored protection plans to satisfy the needs of different clients, common types of consumer insurance include medical, accident, travel, auto and home insurance.

2. Purchasing insurance – key takeaways

Savings insurance:

Savings insurance generally involves long-term investments. If the plan is terminated prematurely, the insured may bear a cost and even forfeit the principal. We therefore advise the insured to evaluate their finances before purchasing a savings insurance policy. It is common for these types of products to have a cooling-off period of 21 days after signing, and policies terminated within this period do not result in financial losses.

Besides looking at the total expected dividends from savings insurance, the insured should also compare the internal rate of return (IRR) of different products on offer to determine whether a product’s annualised return is high or low. It should be noted that most policies do not guarantee pay out of dividends, and the insured should carefully read the terms regarding guarantees and non-guaranteed dividends, policy cash value, etc.

Protection insurance:

As this kind of insurance provides only protection, buyers need to consider the magnitude of risk and their ability to withstand risk before choosing consumer insurance policies. For example, if you are not a frequent traveller, then you don’t need a travel insurance plan with full-year coverage. 

Different insurance products also need to be compared since premiums, after sales service, coverage and benefits vary. One must read the terms carefully to understand a product’s coverage. For example, in the case of auto and home insurance, some companies charge a lower premium and higher deductibles, meaning the insured faces a larger financial risk when accidents happen.

Liability insurance may protect the insured from legal risk. For example, if a window from your flat comes loose, falls to the ground below and injures someone, then the injured have the right to sue you for compensation whether the incident was intentional or not. This usually constitutes the largest financial risk and therefore insurance for “third-party liability” should also be considered when choosing consumer insurance.


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