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A true story about life insurance and grapes.

Friday, September 26, 2014

There are a few big ticket items in life. The biggest is probably the apartment or house we stay in. Another one is a car, for those who choose to have one. 

I know this may not sit well with some of you going by some of the response my blog post on the topic got but children are big ticket items too. 

Another thing that could become a big ticket item for some is the cost of insurance.

In all these, consume because we have to but if we over-consume, we are jeopardizing our finances. Do the necessary research before committing to any big ticket items. 

An apartment, a car, children or insurance. You name it. 

Don't just jump into it and think that things will sort themselves out.

The following is an email from a reader who wants to share with us why it is important to know what we are buying and if we have all the facts before making a decision:

It's been a while since I last emailed you - I hope you have been keeping well.

I saw that you were getting a bit of flak in the comments section of your recent ILP blog entry. I just wanted to share with you that I thought it was a well written, informative and balanced post (no matter whoever who keeps challenging you to show figures that ILP investments ain't great).

Just thought i should let you know that i wished that i had read such a post like your four, five years ago as I was just graduating from school and entering the workforce.

You see, the first piece of advice we hear as we are entering the workforce is: you gotta buy some insurance. 

Everyone was doing it, my parents told me to do it. But at that time I was seriously misinformed - I had no idea at all what the difference was between endowment plans, ILPs or term (in fact my agent did not even bring up term insurance!). 

I signed what I believe to be an endowment plan that had some cover on dread diseases, death etc. There were funny things like yearly bonuses (if the market did well cos the plan was linked to some share investments too). 

Well it has been 4 years since and I have no idea how the plan is doing in terms of returns/yields at all. I suppose it is probably hard to distill out a yearly return because there is an element of health insurance to it (see how confusing it is for me).

So what I'm saying is: I wish I had read such a post like yours just as I was starting out. I wish I had been more informed. I would have bought term, invest the rest. Seriously.

But I'm not blaming anyone. We could look back and say that my insurance agent should have laid down the variety of plans for me, but at the end of the day, they work for commissions - so why would they bother to explain more, if not required as such by regulations? I don't blame them either.

And while I cant go back in time and buy term insurance, I'm really glad that somewhere out there a young person entering the workforce will hear about term insurance and the possible downsides of ILPs from your blog post and make an informed decision.

I guess financial sale persons are up in arms when they read postings like that because they feel they are being vilified as agents who put their own interest ahead of their clients. But but but, isn't that true? Don't all salespersons do that? 

That day, on the outskirts of a Japanese village, I chanced on a roadside store selling Kyoho grapes. I selected a bunch of juicy grapes and handed it to the store owner for payment. 

She put down the bunch I selected, motioned to another bunch and said it was better. And she packed it. Initially I was like, "Wah, so honest!", thinking that she was trying to help me select better grapes. 

When I came back home and opened the packaging, turned out that the hidden grapes behind were all rotten and giving out a foul smell. I had to throw half away.

So the moral of the story is: unless it is obvious to the sales person that you are going to be a repeat customer/ going to intro more customers to them, you are better off selecting your own grapes. 

And you best be knowing a thing or two about grapes, before buying grapes.

Related posts:
1. FREE Investment Linked Polices or Term Life Polices?
2. Slaving to stay in a condominium?
3. Sophisticated consumers lease cars, not buy.
4. What is our attitude towards having children?
5. Financially prepared to be married?


The Sun said...

Believe that financial literacy, especially about the very basics of insurance, is something ideally that all of us ought to learn when we are young so that we can make prudent decisions in terms of the insurance policies we purchase. This is because committing too much money on insurance policies that does not greatly help grow our wealth nor offer much protection in terms of death and TPD coverage can only jeopardize our retirement planning.

Sillyinvestor said...

Hi AK,

I can see a serious effort on your part to spread insurance literacy through your blog.

Just thought I drop by a comment to ask u to solderied on.

The most basic of financial literacy of delayed gratification and living below our means is a constant theme of your blog, but these 2 virtues yield rewards in the long run.

A product that is useless set you back monetarily is more tangible and hence more painful.

Luckily for me, I was never mis-sold... No one peddle ILP even if I was gullible at a younger age.

But since we are most vulnerable at our lack of knowledge during grad or just stepping into workforce, I just thought maybe the concept of BTITR should be properly explained as with investing, there is a lot of risks.

It took me a decade to find something like a plan to be formulate and with the plan, avoid temptations and circle of incompetence.

But there is just too many pitfalls, while it is part and parcel to lose money in investing, starting with investing without some forced savings first might not be a good idea too.

Assume I am just working, if I am savvy, I won't buy Insurance and need not talking to. But if I need ppl to alert me to BTITR and te difference between ILP and endowment, chances are the investment literacy might not be that high too. Going to the market at the stage for investing with only term plans ...

Most probably he will go through the stage of buy term and lose investment money first and then if he preserve, reap the benefits. Otherwise, some Ok endowment and life plan will provide the returns that made the term premium zero in the long run. That in certain sense, say over a period of 15 and above years is sort of guaranteed and also with your capital intact.

We cannot see the same about investing, investing is a jungle, we ca easily get eaten up or step on traps...

Hmm... Why I talk so much??

Anyway... Thanks for sharing your reader's grape story, seem like I am actually a very lucky person, I meet 8-9 insurance agents in my life, none tried to ask me to buy ILP, but from te responses it seem it is very easy to meet a unscrupulous agent.

Must count my good karma.

AK71 said...

Hi Mike,

I am always happy to count my blessings. Seems like you are counting yours too. ;)

Here is another true story shared by OT: OT's ILP.

I agree that not everyone is good at actively investing their money in the stock market. However, buy term and invest the rest could mean investing regularly in an STI ETF using the services offered by POSB and OCBC too.

Investing in the index has become more accessible in recent times. I don't think it is a complicated procedure. What really is needed is time.

"The ... economy is going to do fine. But it won't do fine every year and every week and every month. I mean, if you don't believe that, forget about buying stocks anyway... It's a positive-sum game, long term. And the only way an investor can get killed is by high fees or by trying to outsmart the market."
- Warren Buffett.

I think I should take my own advice and visit POSB or OCBC to start an account soon. ;p

Unknown said...

Ah! AK has been taking flak over some posts on life insurance??? I must have missed that.

Let me give you my experience. I am much older than AK. Shortly after my university graduation, a classmate approached me to buy a policy of life insurance. I recall distinctly asking her to prepare a cheap term insurance as that was all I could afford.

Upon meeting her to finalise the policy, I realised that it was a life endowment policy that costed me around $2,000 worth of premium per annum for a life coverage of $200,000. Being 'nice', I endorsed the policy and that was the beginning of around 23 years of folly. 2 years later, I bought a private condominium. Instead of buying a 'mortgage-decreasing" policy on the property, I assigned the endowment policy to the mortgagor. That was the only silver lining to the folly.

For the next 23 years, I paid my premiums diligently. Over this period of time, I acquired financial wisdom and realised that 'SELF-INSURANCE' was the wiser option.

So, when I retired from employment, I surrendered the endowment policy and encashed around $70,000. That's it. It was a poor decision and I cut it off. So I had paid a total premium of $46,000 in return for $70,000.

Let me end with this remark : There was no internet then and there were small crumbs of financial wisdom available in the public domain. The world of knowledge has changed so much for the better. All in, I am thankful to all who have so generously contributed and are contributing to this reservoir of knowledge and sharing it with strangers!

AK71 said...

From my FB wall:

Chang Han Thomas:
"Sometimes we thought that if we didn't make the mistake, we will do better. Actually if you think about it, the reason we can do better is often because of the mistake. It's comforting to think that without that error that we made in the past, we can move further ahead. But that's using the 'you' today and applying it in the past situation. No point lamenting about the past; move on and succeed in spite of the past"

WeiLun Moy:
"I had cancelled 2 ILP after having it for about 2 years. After I read the yearly summary report, I realised that the the fund manger fees and the deduct-able are really hefty...furthermore the allocation unit would only be 100% after the 4th year (varies based on individual insurance companies). Hence it take a very long time to break even, thus I decided to cut loss and as it's a very bad investment. Just my two cents"

AK71 said...

Hi dorshii,

Thank you for sharing your experience with us here. Always good to hear from seniors who have more experience. ;)

I agree that self insurance is the best insurance to have in life and, over time, that is what we should try to achieve.

We still need term life insurance and its friends in the meantime. :)

AK71 said...

From my FB wall:

Matthew Seah:
"if you surrender after 2 years, i.e 3rd year, you only get back less than 10% of total capital...

Typical allocation of premiums are as follows:
Year 1: 0%
Year 2: 0%
Year 3: 50-75%
Year 4: 75-100%
Year 5 100%

Since you have lost about 3 years of premiums. It would take 18 years of 3% growth to break-even. The fact that the salesperson says 20 years is either because:

1. the returns are generally less than 3% net of costs, or
2. they just round it UP to make it a nicer number to present??? which is unlikely the case.."

SnOOpy168 said...

Insurance , not investment. Both starts with "I" but are different creature altogether.

Insurance for protection for that "just in case". Investment, to me, is to grow the asset & hopeful compound this growth till the time it is needed.

Face to face selling, had put some of us in a duress of sweet talking. The seller is a friend or a SYT/hunk or a telemarket behind the phone. You just been talked into supporting them a little. After all, the objections you raised are all taught in their training class.

As always, when unsure & hesitating, don't sign anything & hand over the $.

Anonymous said...

Easy get in, hard to come out. (so have an exit plan if things go awry or prepare to face the consequences)
People who approach you for something will have their self-interests in mind. Things you find out on your own are more beneficial for your well-being.
There are many ways to skin a cat; ILP for "investment" is not the only way, so always look for alternatives.

just my 2c worth

AK71 said...

Unfortunately, many people end up paying a lot more for insurance than they really should and in more ways than one too.

The insurance industry is a necessary evil. We must be able to separate the necessary from the evil. ;p

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