For a layman without the necessary financial background, the best approach would be to consult your financial adviser. Yet in our self-promoting, consumerism culture today, your adviser might not be the best person to approach if he/she is more concerned about his sales targets and commission than your own interest. So how an individual can know what plans to procure for him/herself for adequate wealth management? I hope that this article will be able to share some insights with you.
Statistics have shown that an average Singaporean is severely under-insured. Most of us think that as long as we have insurance, we are covered. That is a myth. This analogy can be likened to an individual doing marketing. To cook a wholesome meal, all of us understand that we will need a balanced amount of greens, meats, fruits, etc. If you had gone to a supermarket and purchased $100 worth of junk food – does that constitute to your balanced meal? The same can be said for your insurance, just because you are paying a certain amount of money per month, and that you have purchased a few policies (junk food is also food), does that mean that you are adequately covered for all that you need?
First of all, you need to know that each of us have 5 major areas that we need to be insured against:
3) Major Illness
Now that you can identify the five aspects, you need to know what type of insurance is out there in the market.
I will breakdown life insurance into two main types: Investment related and Non-investment related.
Under the investment related type, it is commonly known as an investment linked plan (ILP) which allows consumers to have the best of both worlds: Insurance and Investment. In my opinion, this plan is a double edged sword because while it can be very useful in providing for death, disability, major illness and accidental death coverage for a low premium and allowing cash value to be accumulated; it also erodes away your investment values as you grow older due to the increment in mortality charges. Unless you decide to reduce your sum assured coverage, your cash value will decrease incrementally.
Many advisers prefer selling this plan by selling the concept of allocating a higher premium for your ILP to accumulate cash value and at the same time maintaining high coverage, without advising on the increased mortality charge as an individual age. Moreover, purchasing a BASIC ILP plan shouldn’t cost an individual more than $150 / month (for an individual aged 20 – 30). The reason why ILP premiums can differ by so much depends on the coverage as well as extras that an adviser may bundle into a plan. It is just like heading to a fast food joint and ordering the basic meal without an upgrade. Always verify that what you are paying for is what you need. Some of the frills can be done away with and may be better purchased as an external plan (not bundled with your ILP). Sadly, some extras may be added on simply because an adviser is looking for extra commission and not in line with your purposes. Be careful about paying for extras which you may not need.
As for non-investment type of plans, you can further break it down into two main types: Those with cash value and those without cash value.
Term insurance is what is commonly known as a policy without cash value. Similar to the concept of a parking coupon – If you use it and the parking ticket lady comes by, that works well for you since you are covered against a summon. However, if you use it, but the parking ticket lady doesn’t come by, that means that your money cannot be recovered and is a sunk cost even though nothing eventful happened. Term plans are mainly for coverage against major illness and accidents. The advantages of such plans are they provide substantially lowered cost for a same amount of coverage, however should you remain healthy without accidents, you are also unable to recover your cost of premium. Perceptions of term insurance differ from person to person. An individual who would rather accumulate cash values from their investments would consider the extra premium paid for cash-accumulating plans to be a sunken opportunity cost and prefer term plans. Others who view term plan as a waste of money should nothing happen would rather purchase a cash-accumulating plan.
Under cash value type of life insurance, there are two types: Traditional whole life and Limited pay life insurance. As the plan name ‘Traditional whole life’ suggests that this type of plan requires you to keep paying till age 85 and if you decide to surrender it when you are old, you will be able to get back a lump sum of money. This plan was quite popular back then 10-20yrs ago and from most of the portfolio I have seen, most of them would have one or two such policies. The drawback of such a plan is that you need to keep paying till old and once you surrender your policy, there will be no more coverage. As a result, one is left with nothing when they move on.
As for the limited pay insurance, it’s becoming more and more popular due to the features of the plan. It allows customers to pay for a shorter period of time and be able to enjoy whole life coverage. However, not many advisers seem to be recommending such products to customers and in my opinion, there are two main reasons: It can be quite expensive for older adults and commission is much lower compared to ILP or Traditional whole life plans. However I felt that being an adviser, he/she should make limited pay plan as part of their insurance portfolio. Can you imagine as we grow old and not working, how are we expected to continue servicing the plans? Therefore by having a small sum assured of limited pay plan, it will be good enough to cover at least the final expenses when one moves on.
Note: These opinions are purely my own conclusion and it does not represent any companies. These advices should be taken with a pinch of salt. You still need to discuss with your family advisers on whatever decision you made.
Message from IM$avvy Admin: Login using your Singpass via www.cpf.gov.sg to access personalised services such as My Statement and My Requests to better plan your insurance needs.
Category: Insurance | 2 Comments