Thursday, July 03, 2014

Term Life Insurance and the Brutal Realities of Modern Living.

While I do not buy the argument that concludes that Singapore is a winner-takes-all or a No-U-turn society, many of you may have met someone who experienced the following :

a) Someone does not perform well enough to get into a local University. This person has to pay a lot more to attend a private university. Making matters worse,  this person runs a risk of studying for a degree from a shady degree supplier who may close shop and cannot use his parent's CPF money for assistance. The degree, when finally awarded, is also not accorded the same treatment as a local graduate degree so this person must work twice as hard to prove himself in the workplace.

b) Someone does not perform well enough or refuses to join an MNC/Consulting firm/Bank. For the same pay, he works twice as hard for a SME or start-up which has a serious probability of going belly up or not being able to pay staff on time. Even if he does get paid, he gets a poorer increment at year-end. If he is loyal to his small firm and stays longer than 2 years, he ends up accumulating less wealth than his peers.

In both of these stories, everyone has an easier way out if only they exercised more willpower to show up earlier in the rat-race or took the competition more seriously.

If they make a slip up or tactical error, it takes far more effort and willpower to become on par with their luckier or more careful peers.

This brutal reality of modern living also exists in insurance planning.

My suggestion to "Buy Term and Invest the Rest" always attract a lot of questions when I give my talks. People, indoctrinated by commissioned based financial planners, are concerned at the large amount of risk which was not transferred to an insurance company and wonder how someone like me can sleep at night.

I have a simplistic approach towards insurance planning, I see insurance planning as two options :

a) Listen to your insurance agent.

This is the most comfortable route. The agent presents a risk or fear to you, you react by buying an insurance product. The insurance agent self-righteously tell everyone else that his clients sleep well at night. Before too long, your agent attains financial independence while you struggle with your premium payments.

You can barely save your income as so much of it goes to pay off these premiums.

b) Buy term and invest the rest.

This is the hard route. You research your own term life product since no one will sell it to you. You buy it direct from the insurance firm or a DIY website. There are no returns if you do not die, you live with the fact that if you are successful, you will not get your premiums back. But your next of kin get $1,000,000 should anything happen to you. You pay only $128 a month. Some years you get back 5 months of premium as rebates. ( Like AVIVA SAF Group Life returned 5 months of premiums to me this month. )

After buying term life, you still can't sleep well at night.

What about the critical illness and hospitalisation ? You research CPF and find that you do have limited form of protection in the form of Medishield. The insurance agent can only play up the inadequacies of your plans but you are already insured by the Government !

But at the back of your head, you still feel insecure.

The only way to manage this insecurity is to take on the challenge to invest your money.

You read up and build your investment knowledge, you put your money in a diversified portfolio of stocks, bonds and commodities. You figure out how to tilt your investments towards yields and value-based metrics. You get a comfortable return on your portfolio.

Your portfolio returns start to snow-ball, soon you have a regular cash flow which can cover the emergencies that your insurance can't help you with. Dividends are paid whether you are sick or in good health. Dividends can cover expenses when you are out of job or simply need to study.

As your portfolio reaches $300,000 and above, it pays your living expenses and buffers against hospitalisation expenses. As it reaches $1,000,000, your family gets covered to a certain extent.

But still, at the back of your head, you are worried that something will really screw you over and you will lose out to that guy who spends 40% of his income on insurance products.

Buying term life is easy. Investing the rest is crucial but only slightly harder. The hardest component of Buy Term and Investing the Rest is living a life of relative low risk since you are the guy managing your risk.

Another words, every area of your life needs to be disciplined. You need regular check-ups to look after your health, you need diet and exercise. When you travel, you avoid dangerous places and skip activities bungee jumping. You manage your stress at work and track your blood pressure.

The insurance industry thrives on fear and lack of discipline. They know that somewhere out there are are thousands of folks who won't study investments and are happy to live irresponsibly, they will take on your risk for a ridiculous fee.

Many Singaporeans will continue to buy these tales of woe and in the process attain financial independence for these agents.

( Recently, a third option has become available - pay a professional upfront for insurance advice. This is the best option for folks who rather be writing a novel than reading The Intelligent Investor. The fees are expensive but small compared to the commission you will pay to an agent. I do not consult one so cannot describe in detail what happens if you do this. )












6 comments:

Stoical Keynes said...

Hi Chris,

Well said.

Most people can't believe that my wife and I spend less than $200 per month on insurance.

With regards to those policies "that pay you a sum when you're sick or encounter a personal accident", I prefer to self insure by saving.

Insurance should be meant to protect against catastrophes, not for an additional dental check up.

But like you said, this requires a bit of discipline, to read up and take care of yourself. Might be common sense and simple for some, but incomprehensible to others.

Regards,
15 HWW

Christopher Ng Wai Chung said...

Hope you got your rebate !

Gerald said...

Fully agreed that the way to go is to buy term and invest the rest. But typical Singaporeans' culture is that they always expect some returns or cash value from their insurance policies. Most Singaporeans cannot appreciate the fact that the primary aim of insurance is for protection and not for investment purposes.

I don't think it will be easy to change our culture but thank you for the effort in promoting the right values.

Regards,
SG Wealth Builder
www.sgwealthbuilder.com

Createwealth8888 said...

From 60th birthday onwards I don't have even term insurance; it is on self-insured fund: Medishield (life), MA, SA, RA, and some emergency cash.

Richard Ng said...

For the health insurance, look out for the upcoming revamp of the Medishield (into Medishield Life) which all of the Citizens/PRs will be heavily covered. So, more cash to invest? ;-)

SGYI said...

Very good write up. The insurance industry thrives on fear and lack of discipline. Really well said!