When was the last time you had a review with your insurance adviser? What is stopping you from giving your insurance adviser a call to see whether the plan needs tweaking?
The Sunday Times ran a piece on insurance advisory with a case study looking back on the policies purchased by a 37 year old senior tax manager. The article is titled should I change my insurance portfolio?
The article in my opinion is a good piece but also a dangerous one.
The article, through a case study, lets the reader understands that as your life evolves, the goals for protection, that is the priorities in protection also changes. With these changes, there is a need to consistently review your protection strategies.
This is a good take away as too many of my peers are so scared about insurance agents asking them to put their money in more stuff that they distance themselves from them. The insurance advisory industry did themselves no favors by encouraging a very sales driven culture, hence this behavior. To the peers, they failed to consistently improve upon their protection as they get married and more dependents come into place.
The misinterpretation that protection is a costly endeavor
The danger part of the case study is that it tends to give the idea that to be assured of adequate protection, the annual premiums to pay is not cheap, and that it tends to involve whole life insurance and investment linked policies.
The table above shows the year of review (2008 and 2014) and the corresponding objectives and policy actions.
While it was not mentioned why whole life, endowments and ILPs made up the original insurance strategies, the review in 2008, looks more like an adviser attempting to correct the initial shortfall in critical illness protection.
The 2014 review is more to ensure that the same amount of critical illness protection is available to the assured for life.
Essentially, through the 2 reviews and the initial purchase, it seems that the policies purchase tends to be good commission earning plans. If the overall aim for all three periods is for protection, using term life insurance, whether its a decreasing term, level or not structured with critical illness would be much more cost effective then the plans used to illustrate above.
The term life insurance, without cash values are cheaper and cost effective if the assured is not looking for coverage more than 65 years old. Since the assured eventually wants to set up CI coverage for life, I do wonder why, during the review in 2008, can’t the adviser recommend a limited pay whole life instead of the ILP.
It would seem that the above plan, with endowment plans for savings and ILP for partially wealth building, is a mixture of protection and wealth building. What happens in the liquidation of the 2 ILP’s is a shift from wealth building to protection.
I am of the view that wealth building and protection is recommended to be conducted as 2 different discipline.
By using term life insurance, or to a certain extend, limit whole life, protection is treat as an expense and the goal is to maximize coverage per unit cost paid, to meet the protection needs.
Consumers in Singapore have two web portals to leverage on to compare protection products of similar ilk. They are CompareFirst and DIYInsurance.com.sg, with DIY being commercial and CompareFirst a collaboration by the authorities.
The above table shows a listing of level term life insurance offered by various insurance companies. The price illustrated is for death, TPD and critical illness coverage. Consumers are able to see which is the more cost effective plans provided and in the case of DIYInsurance you can purchase the plans directly from the portal while for CompareFirst, you can compare but will have to approach the insurance company directly.
The illustration above is for $200,000 and if we were to reach the adequate coverage required, we can double the annual premium.
Even taking into consideration the most expensive plan from Manulife at $927 or $1854 for a $400,000 CI, TPD and Death coverage, the protection cost is only 16% of the annual $11,444 premium after the 2014 review.
This is not a like for like comparison, as the endowment plans, ILP and whole life accumulates cash values while term life insurance plans do not.
In this case, the term life insurance frees up $11,444 – $1854 = $9590. This amount can be used for wealth building with greater transparency from unnecessary costs.
The important point here is not, that you should stay away from endowments and whole life insurance (well my opinion is most should stay away from ILPs!) , but to understand if you have a pressing need allocate limited cash to protection, there is cost effective term life insurance.
However, if part of your objective is to build wealth with a particular level of volatility and uncertainty, then endowments becomes a viable product. However not so much for whole life since, although cash value is accumulated, they are more so for protection benefits for coverage more than 65 years old.
By keeping wealth building separate, and using instruments that are more transparent, lower cost, it allows the assured to win by focusing on one of the factors in wealth building that makes a big impact: Cost.
ILP are notorious for having layered of fees, both known and unknown within the black box. Since returns are unpredictable but these fees and costs have to be paid, how much you eventually build up depends very much on minimizing your cost compounding.
To remove that flexible black box that is the ILP wrapper, wealth builders can go to Fundsupermart and Dollardex, boutique unit trust platforms that shows you the sales charge, the management charges / expense ratios.
Unit trust have the same benefits of the sub funds in the ILPs, relatively the same problems, and you may find many of the sub funds in your ILPs listed on these boutique unit trust platforms.
With an insurance article like this, I hope the readers who have their own set of financial advisers can compare and contrast against what they were subjected to.
However, I do not like the idea that there is a likely take away that, “I can only start planning if i have like $500 per month to put away”.
Your money will always be allocated to some current or future spending and protection coverage review should not be carried out only when you received a sudden wind fall.
Even a $100 bump up in salary increment can fund a $200,000 Death and Critical Illness coverage with a level term insurance.
Due to that, consumers felt reluctant to approach their advisers because they do not have the cash. Without the subsequent review, protection cannot match the needs.
As a last note, buying direct from the insurer or going through DIYInsurance, with their 30% rebate may not always be the most cost effective. Depends on each insurance advisers, concessions and cheaper premiums could be secured with bundling.
A good example would be bundling a disability income insurance with an endowment plan. The annual premium can be $338 per year versus $530 per year if bundling do not take place. This is provided that in the planning, disability income and endowment are part of the needs analysis.
This article is brought to you by DIY Insurance. Compare insurance protection, get a 30% rebate on insurance commission and empower your family and yourself. Make the right Protection Decision today!
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