Tan Kin Lian's Blog: Personal risk management

Thursday, April 01, 2010

Personal risk management

We need to accumulate savings and invest them wisely to get an adequate return that is higher than inflation. Most people invest too much of their savings in a life insurance policy that locks them up for 20 years or longer, is inflexible and gives a poor return. When they need cash for emergencies, they have to borrow on credit cards or on their own policy and pay a high interest rate.

Most insurance agents frighten them about the risk of premature death or critical illness (which is less than 10% during their working life) but did not tell them about the risk of insufficient savings for retirement or future emergencies (which represents more than 90% chance of occurrence).

The solution is to buy a low cost term assurance (covering death and critical illness) or personal accident policy (with less than 2% of your earnings) and invest the rest of your savings in a low cost investment fund. If the insurance cover is not available at a low price, it is more important to take care of the 90% risk and have adequate savings for the future.

What are your views about this approach to personal risk management? Share your personal experience.

Tan Kin Lian

10 comments:

Anonymous said...: Insurance for critical illness, death and unemployment are essential.

Our government should ensure that these insurances are available at a low price.

We should make these essential insurances compulsory to all working adults and that it should be run by a nonprofit organization (e.g. CPF board).; April 01, 2010 10:06 AM
Garrett said...: Mr Tan, are you sure the risk of getting a critical illness is less than 10%? What age period are you referring to? If I'm not wrong, statistics have shown that most people will eventually get cancer/heart attack/stroke (all CI illnesses). It's only a matter of when.

It would be good if you could quote your source for 10% CI, as I am very skeptical.; April 01, 2010 10:42 AM
Anonymous said...: Yes, if CPF can take it up to insure the public like the many current insurance products using CPF,eg. DPS, HPS,and medishield. They should also enhance the DPS to allow more and bigger coverage and rider like critical illness.; April 01, 2010 10:49 AM
Tan Kin Lian said...: Reply to Garrett. The risk of 10% is for the occurence of a critical illness during the working life, i.e before age 60 or 65.

Eventually, all of us will die when we are above 70 or 80, and most likely it will be a critical illness. By that time, you have accumulated sufficient savings and there is no loss of earnings (after you have retired).; April 01, 2010 11:24 AM
Anonymous said...: Garrett,
You only make the insurance agents happy becuase that is what they are trying to tell everyone that ALL of us WILL get critical illness one day.
This is NOT true. Yes , at old age one is PRONE to only..and not necessary one will get.
It is critical at this age to set aside a lot of money for retirement instead of waiting for it to happen.
Friend, many out there can't have enough money to get by retirement let alone keeping an insurance policy and worse keeping a wholelife policy to keep the insurer rich.
When you are bringing up your kids and family this is the MOST time of your life and you MUST enough to take care of YOURSELF and the family but insurance agents don't care so long they can sell a wholelife and make a huge commission out of it and whether you can get by is not their business.For poor people only term insurance can serve this purpose adequately.; April 01, 2010 11:58 AM
Ex-Con said...: I agree with Mr Tan's approach. We need to have a reasonable approach towards insurance, medical coverage, providing for family, and saving for retirement. It is a balancing act that salesman and saleswoman often take advantage of using emotions and asymmetric info and conflict of interest.

Life & CI insurance --- do you need it for your ENTIRE life? All of us sure die someday. Do you want or need to pay high premiums and extremely high mortality charges to insure until 90 or 100 yrs old? It boils down to the fundamentals of life insurance --- what is the purpose?

H&S insurance --- you'll want to have this for whole life to mitigate catastrophic medical bills. But the marketing BS comes in with the best private hospitals, and the best medical specialists, and fully 100% cover for deductibles and co-insurance. All these will seriously jack-up your premiums. You need to do rational cost-benefit analysis to see if it is worthwhile or not.

Savings for emergencies --- this one I bet many people not prepared, and no insurance agent or bank RM will advise. Because ZERO commission.

Savings for retirement --- many people are simply not saving enough and not making their savings work hard to beat inflation, especially for the lower-income to the middle-income. Many singaporeans are brain-washed to think that their flat is a retirement asset. Many singaporeans are sold the idea of buying endowments and/or ILPs for retirement. Many will be shocked after 25, 30 years. By then too late already. Even bank RMs will just whack the latest flavour of the month unit trusts, and keep promoting new UTs as and when they come to market, or whenever something reaches a new high price and everyone is interested. Just like property now.

At the end of the day, it is your own responsibility to study and to do your own research. Trust no one, only you can help yourself.; April 01, 2010 12:22 PM
Anonymous said...: Any investment involves some form of risk. For non-savvy investor, it is best to keep the $ in the bank for the time being. With incidents like minibonds, pinnacle notes, land banking & so much more, ppl may have become paranoid nowadays.; April 01, 2010 1:00 PM
Anonymous said...: S$ 2,800 per month dividends?
Are u sure? Are u boosting?
How??; April 01, 2010 1:52 PM
Ex-Con said...: Anon 1:52pm,

Pls see my reply under "Public Transport in Singapore".

The short answer is lots of hard work and lots of sacrifice.; April 01, 2010 6:33 PM
Anonymous said...: I agree with Mr TKL's idea of buying a low cost term assurance (covering death and critical illness). The question now is from whom?

I'll sign up if CPF Board is running this scheme, as I trust them. Is there any other trustworty insurer out there? The way I see it, all private insurers are for-profit organisations and may be less trustworthy. So where do we go from here?; April 01, 2010 9:44 PM