a) premature death
b) serious illness and disability
c) unemployment
d) insufficient income during retirementThe chance of (a) and (b) occurring during the working life is quite low, perhaps less than 5%. By getting bad advice from insurance agents, they spend too much of their savings to insure against these risk.
Most people (i.e. 95%) are likely to face the risk of (c) and (d). This risk can be best managed through personal savings. The savings should be invested to earn a good rate of return and can be withdrawn without penalty, e.g. through a low cost investment fund. The personal savings can be used to cover cash flow needs during a temporary period of unemployment, without the need to depend on borrowings which incur a high interest burden. If the savings are invested prudently, they will provide an adequate amount for retirement.
Many investment products offer a poor yield of 2% per annum. By investing on their own in a low cost investment fund, they can get a much higher yield, for example, 5% per annum. The difference in yield is taken away in distribution cost and other charges by the financial institution.
Here is the difference in the accumulated amount at the end of 35 years from a monthly saving of $500.
Interest Accumulated % rate savings 2% $306,000 100% 3% $374,000 122% 4% $460,000 155% 5% $569,000 186%
Many people invest their hard earned savings in a life insurance policy to earn a net yield of 2% per annum. If they invest on their own in a low cost investment fund, they may be able to earn a higher yield, which could potentially give them 86% more.
They only need to spend 5% of their savings to buy a low cost decreasing term insurance. If this is taken off $569,000, they will still get a net balance of $540,000, which is still much higher than $306,000. They will accumulate sufficient savings in 20 years - so the insurance becomes less essential.
As an alternative, they can also buy a personal accident insurance for $300,000 at a premium of about $200 a year. Most of the risk of premature death is caused by accident.
Summary: the key priority is to have adequate savings (say 15% to 20% of your earnings, in addition to CPF) and to invest it in a low cost insurance fund to earn an adequate rate of return. Spend not more than 5% of your savings on term or personal accident insurance.
Tan Kin Lian
6 comments:
Mr Tan,
You have stated the risks very clearly and to the point. Although it sounds simple and even common sense, not many people are aware of it and hence they spend a lot on insurance for a) and b) and have much less to save for c) and d).
Like they said, common sense is not so common.
Also depending on one's age regarding the chance of hitting (a) and (b)
But I think as long as one is willing to work hard despite harsh working conditions, even if is retrenched, he/she can still look for another job. But if he/she is down with a serious illness, then it is a totally difficult problem.
This is becuase insurance agents twisted the truth. The truth cannot sell much commission, only lies sell.
This shows how ignorant consumers are . MAS still thinks that education can turn consumers into savvy customers. Only some but not the 99% of consumers who still need honest and competent help from qualified advisers.
In fact without the advisers or insurance agents or middlemen the consumers are safer but it also won't work. It would be wonderful if consumers can buy like buying groceries in a supermarket without any influence and interference from a third party.
Not all agents are like that dude. I sell insurance, yes, commission are important to me cause I have a family whom I'm responsible for. When I advise my clients, I will work out for them how long do they need to protect their dependants if they die. And I'll recommend term insurance covering that period. Cause it's the most cost effective.
Not many people have investment or savings, the insurance payout could well be the only source of liquid cash available to a deceased dependent.
And at the same time, if they can afford it, I'll advise my clients to get a shield plan, an upgraded one if possible. It's a small price for 'in case' situations.
And if the clients wanted to do investment, then probably I'll ask them to invest in my company's funds (not ILP) because more of their money will be used purely for investment.
Personally I feel I'm professionally obligated to protect and help do wealth accumulation for my clients. Commission is a reward for my hard work and honest services. Despite getting lesser than if I sell regular plan, at least I've a clear conscience.
This is a good post as it highlights the risk percentage that we are actually insuring against. I've never heard any agent gives me a risk breakdown like this. Most agent simply says that everyone will encounter death & critical illness in their lifetime to justify the need for their insurance package (usually a life plan with high premiums).
Recently, an agent advised me to channel 10% of my salary into insurance, claiming that its the recommended amount.
When I told him that I prefer a term plan which cost much less, he got back to me and said he can advise me on a package of term plans that totals up to about 10% of my salary too. This is bad planning & advice IMO. Seriously, how many people can claim to have ever been given good advice by a financial planner?
Thanks for the good advise given in this post.
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