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6 points in response to Sumiko Tan's "expensive lesson".

Thursday, June 25, 2015

I read an article in the newspapers by Sumiko Tan and felt the pain she must have felt. It is about her experience of buying an endowment policy and cancelling it, losing quite a bit of money in the process. Here are a few paragraphs taken from the article:

"I bought the plan from a financial adviser from a bank I have accounts with. He had cold-called me to arrange a meeting. He was patient in explaining the scheme. The returns looked decent and I didn't ask many questions.

"What really clinched it for me, though, was the shopping voucher... I would get a $1,800 Takashimaya shopping voucher. Shopping here I come, I thought gleefully."


By now, regular readers of my blog would be shaking their heads. Here are three points in response:

1. Always ask questions. No one cares more about our money than we do. If we don't care to ask questions, no one will do it for us.

2. Of course, don't ever ask a barber if we need a haircut. Get second opinions. Oh, we will be doing ourselves a BIG favour by making sure they are not from barbers too.

3. Don't succumb to the instant gratification of yield. If they come in the form of shopping vouchers, run away in double quick time.


Anyway, the writer, Sumiko Tan, bit the bullet and terminated the policy after agonising over it. I could feel the angst in her writing:

"What I had regarded as welcomed enforced monthly savings suddenly felt like a debt I owed the insurer. I felt burdened. I hate being in debt.

"I decided to bite the bullet and backed out, and said goodbye to the two months worth of premiums.


"... at my age and given how I'm childless, waiting 23 years to experience its full benefits is foolhardy. I wish I had realised that earlier.

"It was an expensive lesson, but next time, I will read all the documents, compare products and ask more questions first.

"Needless to say, I also don't get the Takashimaya shopping voucher."

There is sadness but there is also a sigh of relief. I believe she did the right thing if for no other reason than the fact that the purchase robbed her of her peace of mind. Of course, she will be doing the right thing in future after this experience.

I would like to share 3 points a friend shared with me before:

Point number one:
Fallacy
:

Insurance is for savings and investments.
Truth:
Insurance is a risk management tool.

Point number two:
Fallacy:
Be insured for the highest sum we can afford.
Truth:
Get sufficient coverage. Don't over insure.

Point number three:
Fallacy:

All of us need all the different types of insurance.
Truth: 
We go through life stages and needs will change.

All very pertinent points and we will do well to remember them.

Here are some blog posts related to the points raised above:

1. Nobody cares more about our money than we do.
2. The instant gratification of yield.
3. Disastrous investments in the property market.
4. A true story about insurance and grapes.
5. Free "e-book": Retiring before 60 is not a dream.

Read the full article by Sumiko Tan: here.

Aiyoh, so tempting lor.



Alamak. What am I going to do?

AK likes freebies but are these really free? Or are they a return of capital? Hmmm...

13 comments:

Matthew Seah said...

Hi AK,

"Point number two:
Fallacy:
Be insured for the highest sum we can afford."

Oftentimes, the highest sum they are offered is insufficient coverage because bancassurance don't offer term insurance to clients.

Regards,
Matthew

The Sun said...

Hi AK,

Correct me if I am wrong for I think that insurance policies that come with goodies such as shopping vouchers, the costs to the consumer may be 'hidden' (perhaps included in the computation of the total distribution cost component stated in the benefit illustration) and be eventually paid for by the policyholder himself through increased premiums or lower projected returns. As such, a policyholder may not be better off - from a financial standpoint - with such goodies.

pf said...

Wah...think diff tools work for diff ppl. I do a lot of forced savings. Putting away money where I can't see them and touch easily. So, I'm ok for an endowment product. In fact, I find it really easier for me to save money that way towards specific goals e.g. buying my flat. Coz I timed a number of monthly savings accounts and endowments to end at the age of 34 or 35.

AK71 said...

Hi Matthew,

That is a good point. The premium to be paid for a term life policy could be some 90% lower compared to a whole life policy for the same sum assured.

However, if we were to compare apples with apples, then, the guideline of getting sufficient insurance and not being over insured to control cost is a good one. :)

AK71 said...

Hi Sun,

Your suspicion is not groundless, I believe. ;)

It could be a case of getting back our own money. Marketing is such a powerful thing in the hands of a master. Packaging plays a big part in getting people to part with their money. This holds true for all goods and services.

AK71 said...

Hi pf,

I think for Sumiko's case, she could have committed too much to the endowment plan as well and that gave her the jitters. Well, that was the impression I got from her article. :)

Sanye ◎ 三页 said...

"We go through life stages and needs will change." Good point! Incidentally I am pondering over the few life insurance policies I bought during my younger days. As the commitment to my parents has cease and my children have graduated and started working, I think I don't quite need those policies anymore, since my wife is also working and can take care of herself if anything should happen to me.

I think at this state of my life, a good H&S plan is what I need.

What will you advise me, AK? ;)

AK71 said...

Hi Sanye,

I think you should ask your children. LOL. ;p

This was what I told my dad:
Seniors could consider terminating whole life policies.

A good H&S is a definite must have. :)

Jessica said...

Hi AK,

I am in my mid 40s. I have 2 life insurance, each year I am paying more than 2k for a mere 100k coverage. The main reason I am still holding on to it is for the TPD and CI coverage. I have no dependant and I am also single hence I am pondering should I terminate the policies or should I continue to pay for it? Any thoughts will be greatly appreciated.

Regards,
Jessica

AK71 said...

Hi Jessica,

I am in my mid 40s. I know that if I were to buy a $100K term life policy now with $100K CI and TPD coverage now till age 65, I will only have to pay $900+ a year. I know because I recently asked my friend who is also my insurance agent to tweak some of my insurance policies. I tell him what I want and he tweaks. ;p

If you are paying more than $2K a year now for similar, then, you could save quite a bit of money by "tweaking". However, before you terminate your existing policies (if that is what you want to do), it would make sense to check if you can be covered by the same product I am getting.

So, you might want me leave me your telephone number here in a new comment and I will ask my friend to contact you. I won't publish the comment. ;)

pf said...

After going through buying a flat which requires me to check out my insurance and endowments (to qualify for hps exemption), I realized a policy I bought was too expensive for the coverage I get. So, I'm terminating it. Sunk cost for the past, no point to keep it and keep bleeding.

AK71 said...

Hi pf,

What is HPS exemption? How does your insurance coverage affect whether you qualify? I have not bought a HDB flat before. So, I am very blur. -.-"

AK71 said...

RC:
Hello ak, I went to SC to put the FD today and the RM took the chance to introduce an endowment plan. I don't have one currently and recall you wrote before that if you were to choose again you won't have bought endowment plans. Do you mind elaborating further please?
I'll think it's a case of locking some money monthly as forced savings, vs putting that same amount aside for investment opportunities. (Or evening putting that sum into CPF SA)


ASSI AK
It depends on your motivation. What do you intend to achieve with the money? Then, you will have your answer.
If it is a forced savings, be careful to check what is the guaranteed returns of the endowment plan...

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