Tan Kin Lian's Blog: Students and young people should avoid saving in life insurance policies

Sunday, January 10, 2010

Students and young people should avoid saving in life insurance policies

I told this story a few months ago, and wish to repeat it.

A polytechnic students told me that he received a monthly allowance of $600 from this father, who is a bus driver. His friend sold him two life insurance policies that takes away $300 a month in premium. He knows realize that it was a bad decision, as he needed the money for his schooling and other expenses, and finds it difficult to pay the monthly premium. If he gives up the policies, he would suffer a large loss in the premiums that he had paid. He is now in a dilemma.

I like to advice young people to avoid taking life insurance policies, as a large part of the premium during the first few year goes to pay the commission to the agent. If you stop the policy, you will lose more than half of the premiums that you have saved. You will need the savings for other unexpected events.

My same advice goes to young people starting work for the first time. The insurance agent will sell you a life policy or investment-linked policy. They are all the same. You will get a poor return and a large part of your premium goes to pay commission to the agent.

Many people save in a life insurance policy (and be tied up for 20 years for a miserable 2% return), and roll over their credit cards paying 24% per year. This is bad financial management.

It is important for you to save, but you should save in a bank account. If you need to withdraw your savings, you do not have to suffer a penalty. If you wish to invest, do it at a later date, and invest in an exchange traded fund (such as the STI ETF) which has low transaction charges and gives you a good long term return.

But, before you invest, you can read my book "Practical Guide to Financial Planning", which will be available in March 2010, or join the Financial Services Consumer Association, FISCA (www.fisca.sg)

Tan Kin Lian

19 comments:

Anonymous said...: Visit the Financial Planning Association of Singapore(FPAS) too for your rights to competent and responsible financial planning and not being dumped products by insurance salesmen.
Find out what is financial planning and how your needs should be approached. If you need a qualified planner you can request for help for one.
Remember that all planners MUST approach your needs like a doctor to give you a proper check up first before any product can be prescribed and also their recommendations must comply with section 27 of the FAA. If you should find or suspect misconduct you can lodge a complaint and the disciplinary committee will deal with it.Members of FPAS can be censured, suspended or struck off the register depending on the gravity of the case.This should give you confidence to work with a member. FPAS treats complaint seriously.; January 10, 2010 10:51 AM
A Singaporean said...: The Lion Investor reports that MAS has published a consultation paper that proposes to amend section 58 of the Insurance Act as follows:
1) Remove the minimum age requirement to enter into an insurance contract (used to be age 10).
2) Increase the age from 16 to 18 whereby parental approval is needed.
http://www.lioninvestor.com/minimum-age-to-enter-into-insurance-contract/

Personally I am skeptical about the usefulness and motive behind the amendments. It opens up the possibility that insurance companies and agents sell bad products to even younger children. Somehow I suspect that the insurance companies have lobbied the MAS to remove the minimum age requirement.; January 10, 2010 3:24 PM
Concerned said...: The insurance agent who sold the policy to the student has his conscience eaten by the dogs. Knowingly very well that most students have no recurring income and some pocket money and that they are not mature enough to do good financial planning, yet he just sold the policy to the student. Very selfishly, the insurance agent just think of the commission he could earn on any sales generated without taking into account the financial burden this could imposed on the buyer. Very sad, the insurance company approve the sale without checking further on the student finacial background. The law should be amended such that students below 18cannot buy insurance products without the parents consent.; January 10, 2010 5:21 PM
Anonymous said...: Wholelife or endowment plans are NOT saving products and neither they are good protection product. There is NO such product than can give both efficiently when they earn high commmission (total about 250%) for the insurance agents. They both have many disadvantages. Separate the saving from protection and you won't have all the problems of wholelife and endowment products.
What are the problems of wholelife and endwoment?
Expensive; low protection for high premium; low saving despite high premium; long break even; low return despite even after 25 years; lose money and return below inflation; once in you are trapped for whole life; when you need money the loan carries very high interest; if you surrender you lose money; mortality cost increases and accelerates as you get older, you have no choice but to pay to the insurer and this becomes the revenue or income for the insurer. And if you hold for wholelife it is whole life income for the insurer; So do you now understand why they like to sell wholelife products becuase these products give them revenue and income for life.
Lately there are limited premium payment wholelife products in the market. This is another scam concieved by insurers. Did the insurers or your agents tell you you never stop paying even though you stop paying the premium? Did you know that you are paying upfront the future premiums and also the cost of insurance? Did you know the insurers still recieve income or revenue from you for life? This is even better for them..Their income is guaranteed.
come one. Don't be fooled by the limited premium payment term. It is a scam.. You pay more for less coverage and you get miserable return. Did your agents tell the truth? No!!!! the agents and the insurers are in cahoot to fleece you; the agents get high commission and the insurers assured of revenue for life. The suckers and victims are YOU.
It is time you review your agents, their integrity, honesty, their competence and whether they have your interest at heart or their own pocket. Wake up.. your hard earned money is being stolen from you without you knowing it and worse it is someone you trusted all this time.

The Watchman; January 10, 2010 7:13 PM
Norman said...: Here is an experience that I had some time ago.

After hearing several of the sales pitches for "savings plan" myself, they seemed to tell the same story, about how nice it is to save money to spend later, and their policy is the perfect vehicle for it. It was clear to me that the "cashback" that these plans offer is nothing more than a refund on the premium paid.

There was this talkative female colleague of mine, and soon the whole laboratory knew that she was considering buying into one of those "savings plan".

So, I tried to get the message across that if she wanted only to save money, she would be much better off putting it in a savings account or a fixed deposit, and that the savings plan was not her only option.

Unfortunately, I was unsuccessful in getting my message across. "But I want to save", she kept on repeating, not realizing the fact that the plan came with insurance too, and she went ahead to buy the policy.

Perhaps the interesting thing is that, this was a university laboratory where all of us in it were studying for postgraduate degrees in a technical discipline.; January 10, 2010 8:58 PM
Anonymous said...: In response to Norman's post,

It doesnt matter what discipline one is when emotions and lack of financial principles (gleaned from great and prudent investors like Warren Buffet and a few)caused one to become fearful.

As to your peer who kept mentioning she wanted to save, she could have explored several investment or saving options (like saving in a bank vs shares vs funds vs insurance) and come to her own conclusion. I guess most people are enticed by the "convenience" of such easily available "investment/saving" vehicles.

Sebastian; January 10, 2010 9:35 PM
Anonymous said...: She was stupid indeed to have been lulled into buying a plan that locked her up for years only to get her partial refund of her money each year. Assume she keeps for the whole term the return is about 1.5% which she can get from MAY Bank or save in a money market and enjoy all the flexibility and liquidity her money can get. If she for some reason fails to keep up the premium she will lose a lot. This is a trap the agents won't tell you.
Another point is if you are not financially trained don't try to be too smart. Consult, I mean consult a qualified adviser to help you and not insurance salesmen.; January 10, 2010 10:28 PM
Anonymous said...: I think most endowment plan pays more than the fixed deposit interest at the maturity of the plan. For the low risk consumer, it is either normal savings or endowment.

Short term: normal savings & fixed deposits;
Medium to long term: endowment.

To each his/her own. I always offer endowment as a choice. Nobody can force consumer to sign on the dotted line. He/she must have seen the value in long savings with an endowment plan before signing.

Cheers,
An Insurance Agent.; January 11, 2010 6:29 PM
Anonymous said...: An Insurance Agent,
The problem consumers don't know. It is NOT about to each his/her own. You are implying that they know what is good for them. If it is so why should they pay you for rubbish advice 'it is better than bank FD'. (Endowment is a risky product and not low risk.)They could be their own adviser and DIY without having to pay for nothing or crap advice.
This is NOT meeting his/her needs but pander to his/her fancies, wishes or wants. As an adviser your job is to advise what is best for them AFTER giving them a financail check up. But it looks like you don't know how to conduct one . You are a salesman who sells what the customers wish.
But at least you are honest to identify yourself as Insurance Agent and NOT some financial consultant who insults the intelligence of their clients.; January 11, 2010 8:00 PM
Unknown said...: Hi,i am one of those who foolishly went to take up ilp and now i realise i need money to further study and when i want to back off,my cash value is lot lesser than my premiums.What would be the best way to get out without much losses...thanks in advance; January 11, 2010 9:24 PM
Anonymous said...: Either you have invested a lump sum recently last year or you have bought a regular ILP .
Single premium loss is due to the 'crash' in the last quarter of 2008 and and if you have held to this day it should have recouped at 50% but it might be still be loss depending on the fund or portfolio .
If it is a regular ILP it hasn't broken even yet becuase normally it takes about 15 years becuase of the high cost of this type of plan.
What you can do is to take a premium holiday,ie no more contribution and draw out what you need only leaving the rest to appreciate in value, hopefully.
Similarly if it is a single premium
draw down what you need and leave the rest invested.
You can't do much.; January 11, 2010 11:02 PM
Anonymous said...: To the Insurance Agent

The reason why you recommend endowment is because it pays you a good commission. For FD, you will get nothing.

While the interest rate may be higher for some endowment products, you are not really making a fair comparison. FD usually do not impose a heavy penalty fee for early withdrawal, but endowment policy certainly do.

End of the day, you need to conduct an needs analysis for your client before you recommend any product.; January 12, 2010 10:27 AM
Anonymous said...: This 'An Insurance Agent" is likely from ntuc. They love using the bank rate for comparison. They mislead and give false comparison . He or she compared bank rate to endwoment but he or she didn't say how risky the endwoment as compared to bank rate.If one is to assign a risk rating the endwoment is 10 times riskier than the bank FD. As someone said if you liquidate FD there is no capital loss but for endwoment you lose everything. You see, this is how agents con customers by giving false comparison and worse they always use bank rate as the bashing boy.This is typical of ntuc agents. They are all salesmen and NOT financial consultant as shown in their name card.; January 12, 2010 6:08 PM
Anonymous said...: guys after reading the comments i have so view of mine. Please give some advise.

First i think as a PFC he needs to do a fact finding, doing a financial statement analysis and at the same time ask the prospect about his future plan as well as liquidity needs.

Second, as a PFC will then analyze and recommend the products and the pros and cons of it, if he took up the plan.

Third, i think whether life policy is a good savings tools? i have the following view.
1) Life policy no doubt has high cost as indicated by Mr. Tan (about 16mths on average). I was also alarm by this fact. However i think:
1)this instill discipline in savings and

2)secondly this provide you with coverage up till 100 years old as compared to term insurance up to a limited period.

3)Third i think this is a safe product for risk adverse investor

4) Disadvantages. If one is buying whole life insurance one must be prepared to lose liquidity in return for protection up to 100 yrs old and getting a return about 2% (geometric return)

5) Is there any installment with small amount such as $100 per month and give you a geometric return of 2% in the market with similar risk profile? This part i do not know please let me know if there is one.

greenday; January 12, 2010 7:46 PM
Anonymous said...: Their ceo called them sales champions, super dupers. Do you know duper is someone who cheats? The ceo was correct to call them super dupers. These agents are good at duping their clients and policyholders into buying dubious products.Champion dupers.; January 12, 2010 7:52 PM
Anonymous said...: greenday,
you are indeed green in this business. Despite reading so many comments you still have these views about wholelife. Wholeife is condemned becuase it is not value for money.
For protection till 100 years? Don't kid me.. there are term that covers you for 100 years. There are single premium term that covers you till 100 years old and at a cost a fraction of wholelife.
You are happy with 2% return? Do you know if you hold till 100 years old it may be negative?
If you do not know you are truly green.
Put it into a FD for as long as 30 years you may get more than 2%.; January 12, 2010 11:59 PM
Anonymous said...: greenday,
some of the annuitants are wondering whether they can live beyond 85 and here you are thinking of 100 years old. You must be very rare creature.
Most at 65 have canceled their insurance and if you have a wholelife the cash value will soon be depleted until zero when you keep till 100, theoretically.; January 13, 2010 10:40 AM
Anonymous said...: ya i am green in this business. Btw is there a term insurance that cover up till 100yr old and which company offer that?

2nd, can FD generate return more than 2%? example, if i deposit $100 every month and the bank give me 0.125% per yr and assuming compounded monthly for 20 yrs. What will the return be then? will it be greater than what the insurance give me?

I think life insurance still is an instrument for savings and protection but only for certain type of people. These type of people has the following characteristics.

1) Super risk adverse
2) wan to leave a bequest for their children
3) no other alternative investment beside FD

greenday; January 14, 2010 11:37 AM
Anonymous said...: If you take an average of FDs for last 20 years it was in fact 2+% without the risk. With Insurance you only get AFTER 25 years.
Sorry, if you are super risk averse you need to see a financial counselor otherwise you will be condemned to poverty or you have to work harder than the bull or become the CEO to earn fat salary for retirement. Your case you work hard for the money and NOT money work hard for you.If that is what you choose no one is stopping you.You will have only insurance agents buzzing around you becuase they love you and they don't have to lie to con you. All they have to tell you is 'you must keep your policy for more than 25 years otherwise the return is less than 2%, ok or not". This is the truth and if that is what you want ot hear and know. And I wonder if they will tell you another truth and that is ,' sorry , the return is losing money to inflation'.In simple or layman language , you won't be able to buy the things you can buy NOW, ok ?'
Bequest? that is the silliest product for bequest. For similar premium you get 20times more coverage. Isn't it a better way to leave a bequest? 1 million or $20K?
All the best , greenday.

100 years old? UOB Life(now Pru) or AXA or Manulife or 80 years (ntuc); January 14, 2010 7:32 PM

Sunday, January 10, 2010

Students and young people should avoid saving in life insurance policies

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