Microinsurance – should you consider them?
If you’ve only got a minute,
- Microinsurance is an affordable form of insurance coverage but the sum insured is also lower as compared to traditional insurance policies.
- They may appeal to those who are new to insurance, have little savings and desire to build their insurance coverage over time.
- The small cover and duration may not be enough, especially if you have dependents and are vulnerable to higher risks (such as those with pre-existing medical conditions).
Traditional insurance policies may come across as complex and daunting for many of us. They seem to cover many aspects of our lives, yet with the many jargons used, we tend to get overwhelmed and rely on the explanations of the financial advisor.
Over the past year, you may have come across insurance policies which cover more specific aspects of our lives; for instance, dengue fever or and the side effects of Covid-19 vaccine coverage. Such policies are known as microinsurance or bite-sized insurance policies. To find out more, let’s dive deeper into what microinsurance is and whether it is suitable for you.
What exactly is Microinsurance and how does it differ from traditional insurance?
Bite-size insurance are typically available at relatively lower premiums without the hassle of undergoing medical tests and need for documentation. As such, it lowers barriers of entry and is convenient and accessible for those who want to build insurance coverage a bit at a time, without feeling the pinch.
It can be useful especially as a starting point for those who are first-time buyers or the underinsured, as the plan is low cost, requires a relatively shorter commitment, and can be thought of as additional coverage to supplement one’s overall coverage. Such ‘micro-insurance’ coverage can help these people meet their immediate needs and get more familiar with the product before opting for a more comprehensive plan, while building up his/her affordability.
Unlike traditional insurance policies, microinsurance is not as broad and covers more specific forms of accident and health coverage. Some of these examples include dengue insurance, the side effects of Covid vaccine insurance, prostate cancer insurance, and breast cancer insurance.
Why microinsurance is suitable for some
• More Affordable
Microinsurance is generally a much cheaper form of insurance, only costing a fraction as compared to your regular insurance policy. This also means that you are insured for a proportionately smaller sum. The upside of this is that it lowers the barriers of entry for those who are seeking to take on insurance coverage, making it beneficial to those with lower savings. Additionally, you can build your insurance coverage over time without feeling the pinch.
For instance, Ben (not his real name) has just started working after his recent graduation. He wishes to get some form of term insurance coverage without the need to spend much. So, he decides to take up a term life microinsurance. For the 30 cents he pays, he is covered for a period of 360 days. He can choose to add more coverage over time by gradually increasing his 30 cents to 50 cents and to 70 cents, hence boosting his sum assured. Besides term insurance, he can choose to get a critical illness coverage for 10 years at an affordable monthly premium of $5.72 with DBS eCriticalcare.
• Fill in the gaps of traditional insurance
Microinsurance can help you build a more holistic insurance coverage or even boost your existing coverage. Let’s say you already have health insurance coverage. However, you would like to have additional coverage against dengue fever because the area around your residence is a high-risk area. It could then make sense to take on a micro insurance that covers dengue fever specifically. Or if you’d like to boost your insurance coverage you could get additional coverage for critical illness such as for breast cancer, prostate cancer, heart attack or stroke.
Why Microinsurance may not work for you
• Inadequate sum assured
Microinsurance may be low in cost. However, the assured sum is also low. As such, it may not be adequate to cover your needs comprehensively.
• Limited choices available
Microinsurance is still relatively new in Singapore. Hence, there aren’t many vendors and products available to provide you with the adequate coverage which you may require. Presently, the only products available are for dengue, the side effects of covid, prostate cancer, breast cancer, term life, accident, and critical illness coverage.
• Restriction to offer periods and implication at renewal
Typically, Microinsurance is offered on short coverage period with option for renewal. It may not cover the desired coverage period due to risk of expiry or not able to renew or extend coverage period. There may be implication on premium increasement due to change of attained age and may be subjected to underwriting assessment.
Should you consider microinsurance policies?
Microinsurance lowers the barriers to entry for traditional insurance coverage due to its lower cost and short commitment periods as compared to a traditional full policy. It is also good for those who are new to insurance and would like to build up insurance coverage slowly. However, do bear in mind that the small cover and duration may not be enough, especially if you have dependents and are vulnerable to higher risks (such as those with pre-existing medical conditions). It is advisable to understand what is covered and excluded to avoid nasty surprises should you need to make a claim.
As a general guide by the Life Insurance Association (LIA), one should typically have a basic life cover of approximately 9 to 10 times one’s annual earnings. For critical illness cover, there is a recommendation of about 5 times your annual earnings, as five years is the duration of time that one takes to recover from a major illness. As such, microinsurance alone may not be able to provide us with the sufficient coverage we need due to the lower insured sum. Also, its limited coverage may not be enough for those with dependants.
Customers should also keep the following terms in mind as well when making their decision to purchase microinsurance plans:
1. The expiry of the coverage period
2. The claims amount, when needed, may not be enough to cover one’s actual protection needs
3. Eligibility to renew coverage due to age, medical conditions, and to be mindful that such coverage may not be portable
4. Cost of premium while low, may fluctuate with age, or per renewal and customers may eventually end up having to trade off coverage amount for same premium
How does microinsurance differ from traditional insurance riders?
If you want to have additional coverage on top of your regular insurance policies, you may consider insurance riders. They are add-ons to your basic insurance policy and are well-established as an insurance product in Singapore. The main difference between riders and microinsurance is that insurance riders require a basic insurance policy to ride on while microinsurance is considered the main policy itself but offered with a lower sum assured at a lower cost.
Instead of taking up insurance coverage with only microinsurance, a more prudent approach is to boost your existing insurance coverage with the help of microinsurance. By topping up your existing basic insurance policies with microinsurance policies, you will not only be able to fill the gaps in your coverage but can also do so at a lower cost.
Deciding how much insurance you need
Insurance protection is an important aspect of holistic financial planning. While you do not need to have insurance for everything, consider the things that could set back your financial situation or derail your financial goals. To help you decide what insurance you need, make a list of the risks or events that concern you. Assess the likelihood of the event happening and the financial loss you may suffer if so.
Consider how you would cover the financial loss. For example, large hospital bills could set back your retirement goals if you don't have savings or insurance to cover this. Having adequate insurance cover when you are younger also ensures insurability, affordability of premiums and helps to cushion the cost of treatment without having to dig into your savings. Start using the NAV Planner today to understand your protection gaps and get the coverage you need to stay protected!
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Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.
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