Question

Question 2

Julia Tang has been a financial planner for ten years. She specializes in insurance planning. Sam Jones, Julia’s client, has learned some knowledge about insurance from his friends, and he considers that he understands this industry reasonably well. During their meeting, Sam made the following statements. Help Julia to correct her client’s misunderstanding.

(a)	‘An insurance company is just a middleman. It collects premium and pays claims to insurance policyholders. No more and no less.’
(b)	‘By law, I know that I need to buy auto insurance in Hong Kong. I suppose that I can lie about the conditions of my car and hence, I can pay a smaller premium.’
(c)	‘I don’t understand why people buy whole life insurance. Why not simply buy the same dollar amount of term life insurance and invest the difference in a premium myself? Whole life insurance is not useful.’
(d)	‘My health insurance has a two-month waiting period. It is just unfair. I don’t understand why the insurance company has a waiting period.’

Answer 1

Answers:-

a) An insurance company is not just a middleman who collects premium and pays claims to insurance policyholders.

Insurance companies sell policies for individuals, families and businesses to provide financial protection in case of a claim or loss. insurance is an agreement to share risks. When you buy an insurance policy from an insurance company, you're sharing risks with all the other policyholders.The function of an insurance company is to help assess your risks and provide you with the right coverage to compensate you for any loss.  

The insurance company owes you a duty of good faith and fair dealing when handling any transaction. It also has the obligation to faithfully investigate and honor valid insurance claims. Also an insurance company has a legal duty to fully investigate your claim, not just the parts that support their position.

b.) An important factor for determining the cost of a auto insurance policy is its Insured Declared Value (IDV), that is the approximate current market price of a car. As the cost of a car depends on its model, car insurance also depends upon the model of a car. Higher the IDV, higher is the cost of the car insurance policy. For example, the cost of getting a fortuner insured is higher than that of a swift car.

Therefore, telling lie about the conditions of the car and hence paying a smaller premium is not possible in an auto insurance policy.

c.) Whole life insurance certainly offers more financial flexibility with its cash value component. But since permanent policies are more complex and expensive, a lot of consumers buy term insurance and invest the rest.

• Term life is “pure” insurance, whereas whole life adds a cash value component that you can tap during your lifetime.
• Term insurance only protects you for a limited number of years, while whole life provides lifelong protection—if you can keep up with the premium payments.

The only reason to buy a term policy is because of the promise of a death benefit for the beneficiary of the insured if the insured pass away while it’s in force. This insurance is only good for a certain period of time, whether it’s five years, 20 years, or 30 years. After that, the policy expires.

Whole life insurance is a form of permanent life insurance, it never expires as long as premium payments are made. It also provides some “cash value” in addition to the death benefit, which can be a source of funds for future needs.

d.) Reasons why the insurance company has a waiting period:-

Waiting-period in health insurance is implemented to avoid wrong intention of a person to claim benefit under insurance plan. There had been instances where customers without any health insurance, after being diagnosed with a specific disease purchased a health insurance without disclosing the disease to the insurer. So, in order to avoid such unethical practices, the concept of waiting period is implemented in health insurance policy.