Thursday, July 17, 2014

When Insurance Agents attack...

Sometimes, when I get a great day, a friend who believes in insurance writes a passionate message to me to take issue with my ideas on insurance planning. This inevitably strengthens my position, since insurance agents seldom want to talk to me anymore, it updates me on their various tactics which I share with there readers.

Let me summarize my idea on insurance.

I believe in "Buy term and Invest the Rest". This means not only maxing up your term life insurance, it means saving up what you would have spent on insurance on an investment portfolio of your choice. My personal choice of investments are high yielding stocks, REITs and business trusts. Some folks told me that insurance companies invest in the same things to meet their liabilities.

Here are some of the resistances to my idea :

a) Term Life does not last forever. 

We all know that term life does not last forever. Term life insurance like NTUC i-Term covers you until age 84. SAF Group Life only covers up till age 65. In fact, I want to say that all of us prefer not to get a pay-out on term life, we want to live long prosperous lives.

The aim of term life is to transfer risk of early death to protect your human capital or future cash flow. If I die early, my family will not have benefit from my income, the term life insurance provides a cash outlay so that my family would not have to suffer. Beyond age 65, I have no more income anyway, so there is nothing to protect.

Using this similar argument, your child is a dependent and if you are not relying on your child's future cash flow, it is not necessary to buy term life for you child, but your child can sign up for a term life insurance to protect you when your child finds work after graduation.

b) What about hospitalization and critical illness ?

In all of my previous books, I recommend H&S insurance. Personally, I don't have any because I was diagnosed with thyroid and diabetes early in my life and I was rejected by NTUC before when I made my application.

These days, I am mixed about H&S plans. Recently in Business Times, journalists have shed light on the pricing of these policies. H&S insurance plans are cheap in your 20s and 30s - this is an active strategy to gain market share, after which H&S expenses ramp up drastically.

Agents are also notoriously silent on how much Integrated Shield Plans protect above and beyond the latest changes to the mandatory Medishield plans. We are all already effectively insured by the government, the insurance agent needs to convince me as to why government protection is insufficient and why I need a room which is better than B2 wards.

For folks who cannot get a hospitalization plan like me, my portfolio covers the shortfall. I have many layers of protection, Medishield, my maxed-out Medisave account, dividends from my stocks to pay if medisave overruns, capital gains and finally my savings.

c) My cousin contracted Ebola from his goldfish ! My father-in-law has hair cancer ! You need protection from such situations, right ?

This is a poorly constructed argument designed to spread fear.

The "Invest the Rest" component protects your family from these situations and covers other situations like job loss, having a new kid, home renovations, getting sued by neighbours, etc which no insurance agent can cover. My portfolio can even pay for my daughter's plastic surgery if she wants to start a K-POP band.

Your agent needs to paint the scenario whereby someone relies on Medishield versus someone who relies on the IP policy and what the different in costs will be. If your portfolio can handle the difference, it still means that the risk does not need to be transferred.

c) What if the customer is an average investor ?

This line of argument genuinely makes me mad.

People are bad investors because money management is not taught in schools. Instead, the government allows an 'O' level graduate to qualify to sell insurance. These people then go on to call themselves financial planners. Now the industry argues that most people are dumb and should listen to them instead. Many insurance agents also do not know how to invest and are largely responsible for the ignorance in the first place.

I am willing to concede that if you are an average investor, you are better off listening to a financial planner. The same argument can be used to convince someone to buy 4D, if you keep losing money on investments, maybe buying 4D can give you better odds.

But I'm going to offer you an alternative - why not listen to a fee-only advisor ?

This advisor will not have an incentive to push products down your throat and may be able to structure a decent portfolio based on ETF to ensure sufficient diversification.  Many fee-only advisors have come out to support a variant of my "Buy Term and Invest the rest" scheme.

The whole point of this blog is cater to folk who want to be above average when managing their finances. This means that you need to optimize your costs.

And taking a second look at how much you are subsidizing the lifestyle of your agent is a great way to be more frugal with your finances.

Not everyone can win in Singapore society - if you do not educate yourself in the ways of money management, there are a lot of predators out there who would want a chunk of your savings.

1 comment:

  1. I totally concur with you that we should all buy term and invest the rest. Most insurance agents are only interested in selling products that do not meet the needs of their clients. Singaporeans should learn how to invest.