Mr Tan,
Can you give some tips on how to avoid over-insurance? How much is adequate? How much is excessive?
REPLY:
You have to distinguish between the following:
* insurance - to protect against loss of earnings or to pay for expenses
* investment - to get an attractive return on your savings
If it is for insurance only, you should spend not more than 2% of your income. If you annual income is $40,000, you should spend not more than $800 to cover for the insurance of your life, medical expenses and your home and for your family members. (You may have to pay more, if you wish to insure your car).
If you buy insurance as a form of investment, you must look at the return. For long term investment, you must aim for a return of at least 4%.
If you are paying 10% of your earnings as insurance premium (and many people are), and you get a return of les than 2% per annum on your insurance policy, then you are getting a poor deal.
This is why I advise to buy term and invest the difference. Read this FAQ:
http://www.tankinlian.com/faq/fptips.html
A safe approach to avoid unnecessary insurance coverage is to use a qualified adviser. He or she will analyse your needs and financial circumstances before recommending the best products to address them. You will be sure that term products will be used for insurance cover because most properly trained advisers know that this is the best way to meet client's needs efficiently and at low cost.You will not be over insured.
ReplyDeleteAs you have been advised that for investment nothing beats investing
in ILPs or equity funds. The worst way to invest is in insurance products like endowment or wholelife or single premium endowment. They are risky because of reinvestment risk, long lock in, liquidity risk and inflation risk and low return risk.
Imagine so much risk and yet people are still going for them. Why? It is because insurance agents selling them get high commission at your expense.Never use an insurance salesperson.
Buy term and invest the rest is less risky. You can have the cake and eat it.
Dear Mr Tan,
ReplyDeleteDoes the insurance company guarantee at least 4% long term? It may not be realised even after waiting for the long term, right? Or do you based the 4% on past performance and think future will be the same?
You should consider getting a qualified advisor to address your concerns. There are a lot of ethical advisors around and if you treat your advisor well, they will take care of you and your family too.
ReplyDeleteSince you are here visiting this blog, you could consider some of the other advisors listed: Thomas Phua, Alvin Soong, etc or even walking in to NTUC Income's Business Centre (highly supported and recommended by Mr. Tan).
The reason is because Mr. Tan is giving his opinion on his personal basis. Whatever his experience (or tips), while it served him well personally, it cannot be compared with those of the practitioners, who make claims and deliver cheques.
Most importantly, one man's meat is another's poison. Not saying Mr. Tan is right or wrong but only suggesting that you have an open mind and not have a one-size fits all thinking.
If you are investing over a period of 10 years or longer in equities, you are likely to get an average of more than 4% per year, based on past records.
ReplyDeleteFor some periods, the average return can be higher, e.g. close to 8% per year. For other periods, it may be lower, i.e. closer to 4% per year.
Take the investment risk and get a better return. Invest for 10 years or more, so that you can average out the good and bad years.
Invest in a large, well diversified, low cost fund, so that most of the returns are given to you (and not taken away as expenses and charges).
After analysing Mr Tan's posting, it seems to be a good guideline for you and me and its not taught in any financial books.
ReplyDeleteHowever, needs of individuals are different. Its still better to go through a proper needs analysis to guage your insurance needs.
Dear Mr Tan,
ReplyDeleteI am a regular visitor to your blog, which I find it quite informative.
You have been advocating "Buy Term and Invest the rest".
Are you also saying that there is no need for one to buy whole life or endowment policies as they do not yield better returns?
If I extrapolate, does it mean that on hindsight, when you were CEO of Income, products such as Living Policies should not have been sold?
I hope to see your response to this issue in your blog.
Regards