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Six questions to ask about your insurance.

Tuesday, April 7, 2015

My dad bought for me my first life insurance policy when I was just 18 years old. When I started life as a working adult, of course, it was only right that I took on the responsibility of paying the quarterly premium. It costs me slightly more than $1,000 a year for what I now know is a miserable $50,000 sum assured on my life plus coverage for critical illnesses till age 50.

My dad bought the policy for me from a friend who said that he should get a policy for his teenage son because because it was cheaper to buy whole life policies at a younger age. This, I know now, is quite a standard sales pitch. The fact that his friend was a high achiever (ahem, made a lot of money) who led a team of agents meant that he must be dishing out advice that was right for us.

If I had known the stuff I know today, I would have stopped my dad from buying that proposed insurance product for me. $1,000 a year was a lot of money almost 30 years ago. I know that my dad bought the policy for me because he loved me but, really, all my dad had to get for me was Hospitalisation and Surgical (H&S) insurance in case I was hospitalised.


See what I mean?
Taken from DIYInsurance on Life Stage Planning.


Anyway, I am glad to say that things have changed over the years and for the better too. Matters regarding personal finance which were once regarded as esoteric have become clearer as the internet removed barriers, making information readily available to the general public. Many who are in the know willingly share their knowledge and experience in cyberspace. This is a good thing because, till today, I still hear horror stories from people regarding insurance agents.

To be fair, there are good insurance agents out there who are ethical and genuinely care about their clients' welfare. Hard to find but not impossible. If we have to rely on someone, make sure that someone is trustworthy. This, of course, requires us to take a leap of faith.

So, the best thing to do is still to be educated. With education, we will know very clearly what are the options available to us and which options will best serve our needs at different stages of our lives. Then, the next thing to do is to go online and buy the insurance products we need at lower prices. What? Is this possible? Sounds too good to be true?

When I read about DIYInsurance, I thought that this service should have been available sooner. They aim to educate the public, helping them make better choices and save money in the process. What's there not to like?


The good people at DIYInsurance start by asking us to ask ourselves 6 questions:

6 questions you MUST ask yourself about your insurance.

1. Did you purchase Term insurance instead of Whole-life insurance?

The only way to be sufficiently covered by insurance is to purchase Term insurance.  Term insurance is a low-cost insurance in which you only pay for the amount of coverage you require, providing maximum protection at a minimum cost. Most of us will require at least $500,000 and up to $1million when we have a family with kids.

Purchasing term insurance means we are able to sufficiently provide for our dependents livelihood on our unfortunate demise. Not having sufficient coverage means our dependents may have trouble paying off our housing loan, education fees and to maintain their lifestyle. Having $1million coverage would cost less than $200 per month with term insurance. Find out how much life insurance coverage you need here. Compare term insurance products from different insurers here.

2. What is break-even point?

The “Break-even point” is widely referred to in Whole Life and Endowment Insurance (Savings) plans as a point of time in future (Eg. 20 years) when the:

Total amount of premiums paid = Cash value which can be obtained if the policy is surrendered.

While this may seem that we are getting “free” insurance coverage at the break-even point which could be in 20 years time, it is vital to note that the same amount of money now will differ significantly in value in 20 years due to inflation. Which means the value of us paying $10,000 in insurance coverage over 10 years cannot be compared to the value of $10,000 which you only receive in 20 years time. The value of $10,000 is much smaller in year 2035. Our chicken rice used to cost $1 and the same plate may cost $6 in 20 years time. Hence, we have not “broken-even” and are in fact paying for additional commissions, insurer’s costs, insurance coverage and savings element from the loss in insurance coverage in whole-life insurance plans.


3. Have you compared?

Comparing allows you to purchase an insurance product at the best value. The cost savings can be significantly higher.  Insurance web aggregators are popular and widely used in the United Kingdom and Australia. Singapore’s 1st Life Insurance Comparison Web Portal, DIYInsurance, allows you to compare products for your Protection, Savings and Retirement needs from a wide range of companies. Learn more about using web aggregators, there is a complimentary event by DIYInsurance, Plan, Compare & Save on Insurance: Using Web Aggregators on 25 April 2015. Register here.

4. Have you received commission rebates?

Insurance agents are paid a handsome sum of commissions for insurance products they sell. Up to 1.5 years of the cost (premiums) you pay may have contributed to the fees of your insurance agent. This means you are insufficiently insured for the large sums you may be paying. DIYInsurance rebates 30% of the agent’s commissions back to you in cash, providing greater cost savings to you.

5. Do you know how is your insurance agent paid?

Singapore’s insurance industry is predominantly remunerated by commissions. Earning by commissions for a living means your financial planner may have a greater tendency to sell you products which provide them with higher commissions. This means you may be exposed to products which you may not need and pay a higher cost for them. A large part for what you are paying for is channeled to the fees for your financial planner. Buying through DIYInsurance and for you to receive 30% commission rebates means you will know how much DIYInsurance is paid.  DIYInsurance is transparent with every product's commission’s structure so that you know exactly what you are paying for.

6. Do you know how independent your insurance agent is?

To ensure there is no conflict of interest, it is important to ensure that your financial planner is paid on a fixed fee and not by commissions based on their product sales to you. All staff from DIYInsurance are paid a fixed salary and do not participate in sales-based compensation or incentives of any kind. Not being remunerated on a commission-basis means the staff at DIYInsurance are independent and are able to focus on doing their best to fulfill your needs. There is no hard-selling and no over-selling.

Pay less for your insurance today.

AK agrees.

29 comments:

unluckid said...

Hi AK,

Just wondering, are you still paying for that insurance? I bought a Whole Life plan from my friend that only needs to be paid for 20 years, at about 2.4k per annum. Kind of regretting it, but as its from my friend its awkward to cancel. Any advice?

AK71 said...

Hi unluckid,

Well, in my case, I have been paying for a quarter of a century and I don't want to upset my dad. So, just keep it going for now but I am sure I will terminate it one day. As a consolation, apparently, the policy is now in the money.

I don't know what is best for you but if you bought the policy only recently, you might not lose much by terminating it. You might want to compare with other options available first and see if you could get better value for money. :)

gerimegaly said...

Hi AK,

I must correct some of the misconceptions here.

1) Whole Life Insurance IS cheaper when bought as a Child. The writer had bought a policy 30 years ago. Premiums back then were much more expensive. Nowadays, premiums have become more competitive and for $1,000 a year, you can get $100,000 Whole Life with Critical Illness coverage for children. (I became an agent 26 yrs ago, and yes I agree, premiums back then were much higher, as compared to plans nowadays)

2) No need for Critical Illness Cover for Children. Buy only when in Adulthood.
Getting your children covered earlier, removes the possibility of being uninsurable, later in life. No one can predict how one's health may change 15 - 20 years down the road. Once you develop medical issues, even minor ones, it will affect your chances of getting insurance, later on in life.

Do bear in mind that Hospitalisation Plans are good, but they only cater to paying your bills, in the hospital. What about other non-hospital stay expenses?

A child hit by cancer, will need more care, attention and love by his/her parents. Can they afford to take time off their jobs, to care for their child? If they do, wouldn't their savings be affected? A Critical Illness plan pays out cash, and this cash will be helpful in meeting such expenses.

My teenage daughters are insured $200K for Critical Illness. If a Critical Illness should happen to them, I know that there will be this "emergency cash" that we can tap on, for ANY purpose.

SMK said...

Is this a sponsored post by providend? So interesting that 2 posts from 2 blog popped up recently promoting diyinsurance website.

I think no need even for fee based advisers.

Just go to
http://www.comparefirst.sg/wap/homeEvent.action

MaoMao said...

Hi AK,

I am not an insurance agent but I think it is a decent job without ill intent (Not 杀人放火). Earning commission is nothing wrong. We do not complain when a plain roti prata costs us $1.20 even though that little quantity of flour is only less than $0.10. The uncle clearly has profited $1.10 of commissions a.k.a profits. Why can't we DIY making our own roti prata?

RayNg said...

Hi unluckid,

Please check the clause properly if there is no small print condition stated as "provided the yield return is equal or exceed certain percentage."

There are cases consumer force to pay beyond 20 years due to poor yield.

AK71 said...

Hi gerimegaly,

Yes, my own experience has generally not been good. In recent years, I was lucky to have met an agent (who is now a friend) who would really think of what is best for me and not what is best for his wallet. ;p

The rest of the stuff you have said, I will alert the guys at DIY Insurance so that they know and maybe reply to you. :)

AK71 said...

Hi SMK,

Yes, I always label or tag advertorials at the end of the blog post. You will see it here too. :)

AK71 said...

Hi MaoMao,

Alamak. Cannot compare roti prata and insurance lah. Haha... I think the roti prata uncle's cost of doing business is rather high. Must sell don't know how many pratas to cover the rent of the stall alone... -.-"

Anyway, everyone must make a living. I am not against being paid commissions. I am in sales and I get paid commissions too. :)

However, I am always mindful to sell to customers what they need and not to sell what will make me the most commission. OK, I won't say anything else for fear of opening another can of worms. -.-"

Shawn said...

Hi Gerimegaly,

This is Shawn from DIYInsurance. Thank you for your response to the comments here.

1. I agree with you that Whole Life Insurance is cheaper when bought as a child. It is a good point that you brought up for parents whom are looking for life insurance coverage for their children. Term Insurance will still be the way to go to provide for sufficient coverage for adults as mentioned in the post.

2. I agree that some critical illness coverage is required for adults. And this coverage is essential for the same purpose which you bought for your daughters. This critical illness need is also displayed in our Life Stage Planner: http://www.diyinsurance.com.sg/portal/beeducated/life-stage-planning.jsp

I want to highlight to everyone that it is important to understand critical differences between DPI and regular offerings. They are in points 2 and 5 of this article: http://bitly.com/comparesavedpi

SMK said...

Paiseh. Not labelled in mobile interface though. While the other blog stated clearly in its post paragraph body.

AK71 said...

Hi SMK,

This is one reason why I disabled the mobile version of my blog for a while. I know it is incomplete.

The mobile version also does not display my blog's disclaimer which I am rather concerned about. -.-"

I re-activated the mobile version only because a few readers told me they missed it and I didn't want them to lose what was convenient to them.

We have to take the good with the bad, I guess. :)

gerimegaly said...

Hi Shawn,

Thanks for your response.

With reference to Point 2 of your reply. I believe you may have misunderstood me. I was referring to the importance of children being covered for Critical Illness - which was not reflected as a Protection Need for children, in the pictorial illustration shown in AK's blog article.

I believe strongly that when a family member (especially so in a young family setup) contracts a critical illness, everyone in that family will be affected...be it emotionally, physically or even financially. What more when it is a child, hit by a critical illness.

Kelvin Lau said...

Hi Ak71

Can i ask you, how much is your surrender value now of your so called whole life policy, if it is still in effect?

My parents also bought me a while life policy when i was 17 years old, and i am still paying the yearly premium. Looking at the surrender value, it is giving me a compound interest of almost 3.5%. By that, i don't think it was a bad decision then.

AK71 said...

Hi Kelvin,

I have not looked in many years. I just keep paying.

I won't be surprised if the returns are similar to yours. Well, I hope so.

My friend cum insurance agent told me to simply regard it as a more conservative portion of my investment portfolio. :)

I mean I can say that I could have invested in a company like ST Engineering which I first bought at $1.55 a share and hold it till today for better returns. Buy term for the insurance bit. However, it would all be on hindsight. ;p

A3_SG said...

Hi AK,

I had two kids and bought Life Policy (w CI cover), Early CI, Aviva MyShield(H&S) for both of them. All polices are paid within limited 15/20 yr period.

My considerations are 1) As a non-cash gifts to my children besides providing good education, hopefully they can pay it forward for their own children; 2) To insure against unforeseen cost due to children well being, which may affect my retirement plans.

For Sharing.
A3_SG :)

AK71 said...

Hi A3,

Thanks for sharing your perspective. I am sure that we might have different motivations for buying insurance. :)

I am not a professional in this area and will wait to see if the guys from Providend might provide us their views.

E H said...

You should request for the latest surrender value as well as benefits illustration table. You could possibly be under water. Companies used to be very generous in their forecasts many years ago.

unluckid said...

Hi Ak,

Thanks for the reply, I think I'll keep it as a conservative part of portfolio too hahaha. Really appreciate the effort u put in to reply everyone :)

Chris said...

Hi gerimegaly

This is Chris, from Providend, the financial advisory firm that launched DIYInsurance. I do agree with you that H&S policies mainly cover hospitalisation bills and not others, like alternative medicine and others. Buying critical illness plan for children will help. I also agree that health may change in the future and there is a possibility that the child may no longer be insurable. While it is good to provide for all this "what if's", and there are so many "what if's" in life, I guess they need to be considered together with other needs & priorities in life.

The more we take care of all these "what if's", the lesser we have to save and invest for the big ticket items such as retirement, children education, etc. And also the lesser we have to live a quality life now. The key here is to have balance and to prioritise.

So in the overall scheme of things, I would agree with AK that buying a critical illness plan for children is not a priority (as what the picture has indicated). However, if budget allows one to do so, by all means, go ahead and buy that plan for the child.

Thank you .

Chris said...

Hi A3_SG

This is Chris, from Providend, the financial advisory firm that launched DIYInsurance.

Thank you for sharing. I am a parent myself and I can understand our love and concern for our children.

Would like to share our views at Providend as well as DIYInsurance. While we can understand the motivation behind buying those policies, we believe that buying a whole life insurance for children is not a priority. This is because, if death occurs at this stage of their lives, they will not affect us financially. If they contract a dread disease, the biggest cost is hospitalisation expenses which can be taken care by your Aviva MyShield.

As an earlier commentator in this thread has commented, there could be cost which a hospitalisation policy such as MyShield cannot cover. Also, our children may grow up and subsequently becomes uninsurable. While all these are true, we need to consider this in the context of our overall financial plan. We as parents have many needs besides insurance, but at the same time, we have limited financial resources. The more we take care of the “what if’s” in life, the lesser we have to save and invest towards our children’s education, retirement and to live a good life now with our families. So we need to prioritise and buying a whole life with critical illness is not a priority. But of course, after considering all other needs and if you still have a budget, you can go ahead to buy these plans for your children.

I have another suggestion for you to consider as a gift. Instead of buying a whole life plan for your kids, you can buy a cheap term plan for yourself (meant to give your kids, if you pass on), and invest the premiums you save on that whole life, into dividend paying stocks, like what AK has always been teaching. Of course, this is just one of the many ways you can give.

You can check out your premium rates for term plan on DIYInsurance and see if this is viable as I do not know your age.

yeh said...

Hi ak.
I got 2 thing need your advice. Can I email you? Hahaha

AK71 said...

Hi E H,

When I checked a couple of years ago, the policy was in the black. Should be safe to assume that it still is. Anyway, not terminating. So, just let it be. In another ten or twenty years, maybe. $1,000 a year to keep the peace at home. ;p

AK71 said...

Hi unluckid,

To be honest, that advice was really to console me because I have been paying for that whole life insurance so many years.

A better more conservative part of my portfolio would be the CPF-SA with 4% returns per annum. Then, I save a lot of money by buying term for the same coverage. ;)

AK71 said...

Hi yeh,

Sure, just send me an email like you did before. I will reply when I have the time to do so. :)

E H said...

To keep the peace, you can consider terminating the policy, then return your dad his capital. And you keep the rest. I am sure you have other insurance policies as back up.

AK71 said...

Hi E H,

In this instance, I am quite sure money is not the issue. :)

AK71 said...

“MAS’ proposals seek to address the risk of consumers making purchases of financial products that may be unsuitable for them when they are prospected at retailers or public places,” said the authority.

It also said that the proposed guidelines complement existing rules and practices, such as the regulations governing the provision of advice on investment and insurance products, as well as the marketing of such products, and that the guidelines ensure consistency and alignment of standards across the industry.

“MAS recognises the importance of marketing and distribution activities at retailers and public places to some FIs’ business models,” said Mr Lee Boon Ngiap, assistant managing director for Capital Markets. “These proposals seek to strike a balance between allowing FIs flexibility with their marketing and distribution activities, while safeguarding consumers’ interests when they purchase financial products at retailers and public places.”


Source:
http://www.channelnewsasia.com/news/business/singapore/mas-to-enhance-safeguards/2003102.html

Joe Koh said...

Please do your own due diligent and ask for quotation from multiple sources.

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