Dear fellow retirer,
The fact is insurance is extremely important for most of us. It is an easy and very cost effective way to transfer the risk of death, diseases and accidents and other calamities out of our financial portfolio and to a financial institution.
But it is not as simple and transparent as it may seem. Why? Because even for a very similar kind of protection, the legal clauses as well as the premium can be surprisingly different. There are some products that are great value for money and others that are day light robbery. And the average insurance agent is not inclined to tell you the difference.
One yard stick to measure the cost effectiveness of otherwise similar products from different manufacturers is the coverage to premium ratio (CPR).
Simply put, the coverage to premium ratio gives you the number of years in which you would have paid the entire sum assured to the insurance company in the form of premiums.
To calculate CPR, divide the sum assured for death/TPD or critical illness (dreaded diseases) by the annual premium payment. Obviously, the higher the CPR, the better. A good benchmark is 25 i.e. it would take the client 25 years to equate premiums paid to sum assured.
Why 25 is a good benchmark is because if the calamity covered by the policy strikes any time during the 25 years that the policy has been in force, the policy amount paid out would be greater than the premiums paid (not considering inflation or opportunity costs).
And a lot can happen in 25 years.
The good news is that there are several very cost effective products in the market that give you coverage for death, total permanent disability or critical illness - with CPR of as high as 75 years!
Such a high number almost guarantees it to be a winning investment for the client ... and insurance should indeed be seen as nothing short of an investment.
Term plans and some whole life insurance policies fall into this category of cost effective products.
Ask your independent financial advisor or call us to know more.
The plans that are expensive i.e. with CPRs below 20, are usually high cash value, high commission, high cost products. Examples include endowment plans, some whole life plans and investment linked policies.
We would like to emphasise to all our readers to seperate insurance and investments i.e. do not lump protection and accumulation goals in the same product. This reduces transparency and often delivers sub par returns.
