How to read & understand insurance policy documents

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Here’s a life skill they really should teach in school: how to read and understand an insurance policy.

After all, there’s no point in getting top exam scores and getting corralled into a high paying job… only to lose that hard-earned cash to a lousy insurance policy because you didn’t know what you were getting.

Whether you bombed the PSLE or still look back fondly on your “glory days” decades later, it’s never too late to upgrade your knowledge. I promise it will be less boring than doing those mole calculations in chemistry or, worse, social studies propaganda.

Without further ado, here’s a 101 guide to understanding insurance policies.

List of insurance policy documents

For shorter-term policies, like car insurance or home insurance, you might not receive any documents other than your application details and your policy.

But if you sign up for a longer-term policy like life insurance or hospitalisation insurance, you’ll typically receive some or all of the below insurance policy documents:

Insurance document

What it shows

Product summary

Features of the product

Policy illustration / benefit schedule

Table of benefits

Bundled product disclosure document

Comparison against term product (for bundled or hybrid products only)

Product highlights

Key benefits of policy

Know Your Client form

Confidential fact finding form to be filled in with your particulars

Application form

Copy of form filled out when applying for policy

Policy contract

Particulars of policy

Guide to Life Insurance / Guide to Health Insurance

For life insurance or health insurance only, issued by Life Insurance Association

Direct Purchase Insurance factsheet and checklist

For Direct Purchase Insurance only

While it’s tempting to pretend these documents don’t exist, it’s in your best interests to go through them so you know what you’re purchasing.

Glossary of common insurance terms

Insurance policies might look like gibberish at first glance, but fear not, once you get used to a few commonly-used terms, you’ll find that they’re always harping on about the same few things.

Before you start reading, take a look at the terms you are likely to come across.

Benefit – The incidents and circumstances you are being protected against. If they take place, you will receive a payout from the insurer. For instance, if your plan includes benefits for hospitalisation, you will receive (an) insurance payout(s) if you get hospitalised.

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Cash value – Amount of money that is accumulated over time by hybrid life insurance policies like whole life insurance, endowment plans and investment-linked insurance.

You will receive the cash value of your policy when the date scheduled for payout arrives, or when you surrender your policy.

Claim – A claim is made by you to obtain the coverage provided by the insurance policy. For instance, if you buy travel insurance for a trip and then your flight gets cancelled with no refund, you can make a claim for the cost of your air tickets.

Co-insurance – Percentage of your bill that you must cover on your own and that will not be paid by the insurer. Most commonly seen in hospitalisation insurance.

Conditions – The obligations and responsibilities of you and the insurer. Make sure you fulfil all these conditions or you might lose your insurance coverage.

Deductible – Amount of money that you must pay on your own before you can start to make an insurance claim.

If you have a hospitalisation insurance policy with a deductible of $3,000 and you incur a hospital bill of $10,000, you must pay the first $3,000 of the bill and then make a claim for the remaining $7,000 (subject to any co-insurance that must be paid by you on the remaining $7,000).

Most commonly seen in hospitalisation insurance. Entry date, policy date – The date that your insurance coverage starts.

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Exclusion – Exclusions indicate situations where you will not receive insurance coverage. For instance, if you have a travel insurance policy that excludes you from coverage if you participate in extreme sports, it would be a good idea to avoid cliff diving on your trip as you won’t be able to make a claim for medical costs incurred while doing so.

Policyholder – That’s you, the person being protected by the insurance! Hello!

Premiums – The price you are paying for your insurance policy.

Sum assured – The amount your policy will pay out if the event against which you are insured takes place. If you have a life insurance policy with a sum assured of $500,000, a sum of $500,000 will be paid out to your beneficiaries if you die.

Surrender value – When you choose to give up a policy with cash value (eg. whole life insurance, endowment plans or investment-linked insurance), the surrender value is the amount of cash you will receive in return.

Termination – If your insurance cover gets terminated, it comes to an end prematurely.

How to read an insurance product summary

Your insurance product summary summarises in a “few” words the key features of your insurance policy.

It usually begins with a table on the first page, followed by a breakdown of the main categories of coverage. Skip to the end of the document and you might find information about your premiums and other info like loyalty bonuses.

Skim through this document each time you purchase or renew a policy just so you don’t run the risk of neglecting to make a claim when you could have. You might find it useful to highlight the titles of the main categories of coverage so you can see at a glance what you can make claims for.

How to read a benefit/policy illustration

Policy illustrations or benefit illustrations show, using tables, the benefit amounts you will receive in various situations.

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This document is typically issued to life insurance policyholders and might include information such as your estimated insurance premiums if you renew your plan (for term insurance).

For policies with cash value (ie. hybrid life insurance plans), the benefits table will show how much you will pay into your policy, as well as your projected non-guaranteed returns and estimated surrender value over time.

The policy illustration document can help you plan for the future by anticipating your future premiums or returns, so keep it at hand when planning your finances. However, do take the figures with a grain of salt as any estimates or non-guaranteed returns are not set in stone.

How to read an insurance premium table

The premium table indicates the premiums you will have to pay over time.

For instance, if you have hospitalisation insurance, the premium table will show how much you need to pay according to your age, and you can pre-empt the rise of your premiums as you move into the next age bracket.

Keep your premium table handy when planning for the future, as it will show how our insurance costs rise as you age. You can also refer to your premium tables when comparing insurance policies from other insurers, in case you are thinking of switching plans.

Take note of insurance policy exclusions!

It’s always a good idea to have a look at the list of policy exclusions to avoid any nasty surprises.

You don’t want to pay insurance premiums year after year only to discover in twenty years’ time that your hospitalisation policy had actually been excluding you from claiming for a pre-existing condition from the start.

Policy exclusions are also important to look at when comparing plans. Two policies from different insurers may look identical, but one may impose much more onerous exclusions than another.

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Not sure? You have a 14-day free-look period to cancel it

Your agent may not want you to know this, but you can actually cancel your policy and receive a refund within 14 days of receiving your policy documents.

So, before you chuck your insurance policy documents into the drawer where you keep all your old receipts and Singpass token, never to see the light of day again, force yourself to go through them during that 14 day window.

If nothing else, at least you can get some bedtime reading material that actually helps you fall asleep faster.

This article was first published in MoneySmart.