I got a call at work today from my first insurance agent. He thinks it’s a good time to do an annual review of Drizzt’s insurance and investment portfolio.
For those who are new to my blog, you might want to read my insurance philosophy, why I don’t like endowment plans.
Now let me just say that it is absolutely necessary to do this kind of review. Your life, goals, risks and dependents changes so you might need these policies.
My agent knew from past experience that I do my own investments and believe very much in using term life insurance to hedge my risk.
My agent, unlike many new agents (he is experienced with 13 years in the industry) doesn’t believe in ILPs. This is especially so after the great financial crisis in 2007. Many folks who have bought ILPs have seen deep drawdowns in the value put in not to mention high distribution costs.
What he thinks I am missing for my needs
He have been advising me for 2 years and this will be the third year. He finds that it is such a waste for me paying all those premiums and not getting any money back.
He would advise that I purchase either a G10 or G15. Now folks who are not familiar with G10 or G15, I would explain that they are limited whole life plans where you pay 10 to 15 years and then you can stop servicing the policy and would be able to own the coverage.
This is not the first time recommended to me and you can read all about it here where I complain my difficulty in calculating these limited whole life policies.
Now If you are going to convince Drizzt to buy a limited whole life its not going to be that easy since Drizzt is not your normal gullible client who will likely agree with most points you have presented.
So here are some of the points he highlighted to me why I need these policy.
1. Unlike your investments, when you get bankrupt, you still have your insurance policy to fall back on
What he explained is that, many rich and affluent clients of his still buys endowment policies from him. The main reason is that should they get sued or undergo some form of litigation and get bankrupt, they will still have their insurance policy to fall back on.
I think rather than fall back on, it either means
- their dependents don’t have to suffer just because their parents faced setbacks
- that endowments cannot be liquidated to pay for the litigation and the insure will have this to fall back on.
Number 2 is entirely new to me, and I hope other insurance advisor to say this is otherwise.
I think this is very powerful. When you have a client that is savvy, reference to people that you have successfully sold to, are successful and where your client aspires to be at.
Explaining that their “role models” are doing this makes it all the more reason to buy this despite your initial misgivings
2. Leverage on your insurance to do more
Savvy people are always thinking what more they can do to put their money into good use. And the rich loves to leverage.
Say for example the rich wants to divide a sum of 6 million dollars among 5 sons for 1 million each. Dividing it up by giving each son 1 million will result in only 1 million left for the rich man.
With insurance, the rich man can use a portion of his wealth to purchase an insurance that will provide a sum assured divided equally upon death to his sons.
3. Use insurance to prevent your cash from getting depleted
People like Drizzt tend to count their pennies quite a fair bit and usually this argument works best as well with term life insurance versus whole life insurance.
It might be true that you will have a networth of 100k-400k cash. Cancer is one of the big killers in Singapore and if you suffer from it, your 300k coverage might look a lot but you will have to think that should you deploy half of it for treatment and you survived, you cannot work at 100% capacity.
Because of that your income falls or you might need to stop working for some time. Should there be a relapse, you will not have another CI policy to fall back upon.
Possibly this will work on Drizzt since you are playing on his fear of seeing his hard earned assets plunge to nothing.
But Drizzt pose this questions
- At how much would it be enough to insure against this scenario? how much is really enough?
- Given that this amount in (1) to be substantial, do we think Limited Whole Life would be able to cover that big of an amount for a average earning family?
4. Diversify because you do not know what life will throw to you
Life is great for a lot of reasons but at some point it will throw a nasty spanner at you. Even if you have a good job now and have a good buffer you really do not know what will happen down the road.
While you will lost a lot of your wealth with an insurance policy it becomes the last line of defense.
So his advice to at least save 10% of your disposable income for this.
I find this argument abit weak:
- If life were to throw a different spanner at you, you may lose this life insurance policy. At the end of the day, we can argue all day long and still a series of unfortunate will just killed your policy.
- If 10% of your disposable income comes up to $400, you will only be able to purchase a limited amount for insurance.
- Saving a very little amount in Limited Whole Life insurance for me do not make much sense when u already have that amount in cash already.
I think the crux of this article is not to teach an insurance agent how to sell it to increase sales, but to think through whether persuasive arguments make sense to you.
At the end of the day, Drizzt is not really savvy in insurance. He just know a little bit more than the average folks in the street. I do take what my insurance agent presented and evaluate at night.
I still find that
- Limited whole life should not be part of the majority of your insurance due to cost constraint.
- Cost is a big consideration when choosing which Limited whole life to purchase.
What do you guys think? 4 valid arguments?
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Friday 20th of July 2012
By the way, I believe insurance is useless (or becomes less useful) past a certain age (when our dependants are not dependent on us anymore, and when we are not economically active). Everybody must die, when we are old, and it's time to die, let us make peace and go.
Whole life is useful only if our family is so poor that they don't have "coffin money" for funeral expenses. Otherwise when I'm 80 and die, I don't think my family needs any money. I'd rather they have fond memories.
Friday 20th of July 2012
Insurance becomes less and less important when we accumulate wealth. This is because we can self insure. Try selling a critical illness plan to Bill Gates. Tell him if he falls sick, the plan will pay for all his medical treatment, and he will laugh at you. He can pay for the treatment himself with the money he makes in the blink of an eye.
So we should only insure what to us are catastrophic risks. If I have 10 million is cash and assets, do I need to insure my car against own damage? (third party claims is another issue). No because if I wreck my car I can easily replace it. Lower down the scale, if I have only $10000 of assets and earn $3000 per month, I need to insure my $50000 car, but do I need to insure my $300 bicycle?
Personally I only believe in term policies.
Saturday 14th of January 2012
My 2 cents worth as an insurance agent 1. If you are competent in financial planning, this argument won't work for you. This argument is only valid for 1% of the population who borrows intensively. Are you? And for such people, they do not even think of buying WL to secure their money. At most they just transfer the money to another person.
2. Argument isn't valid. There are many more things on earth to leverage your money on. Insurance ranked lower.
3. Argument incorrect. Insurance premiums depletes your cash! Meanwhile, Drizzt I will answer your 2 questions I. 300k is not enough. I have seen cases with400k. 500k may be a more suitable amount. It depends on the stage of cancer and the type of treatment administered. Even so, YOU SHOULD HAVE BOUGHT A MEDICAL EXPENSE INSURANCE so that it does not affect your other coverage. If you have spare cash, get a CI insurance, especially one that can pay out in early stages. II. LWL should not be your comfort at this Time. It depletes the purpose of a life policy, unless you are on your death bed. Get a CI policy instead, please refer to point 1.
4. This I agree. All insurance policies have their pros and cons. And I mean ALL, including term. WL is expensive, term will expire one day. Even AVIVA SAF have its own limitations. Go google for their T&C. I advise my young clients to buy term, but note that the term will expire one day and there are insurability risks; and to buy a WL when they are older at about 40 years old and are more financially stable. FYI a whole life policy is very beneficial when you are old, because your life will always be valuable even if you are on your death bed. Put yourself in the shoes of an average old man in Singapore with adult children. Will there be a difference in how they treat him if he has a $100k life policy? It is an ugly side of human beings that I am bringing across, but it is true. As we are all still young, we cannot picture that scenario. And cost will be a crucial factor in our choice of insurance. Hence term will lose to WL.
In conclusion, his arguments are not appealing enough.
Saturday 5th of November 2011
Buy Term and Invest the Rest sounds like Warren Buffet's school of Thought. This is only good for those who really have lots of money for investments and really buy lots of investments.
Saturday 5th of November 2011
Not necessary Wani. The key is to know how it works and save instead of spending that extra that will go into distribution cost. The distribution cost is a killer in itself.
Saturday 21st of May 2011
with no offence, but i think its risky with all the various trust and reits. during good times, no doubt they are profitable and lead to high profit.
They then gear up and leverage more so that they can get more profit in. for reits, when property value drop, bank might ask for additional payment. and its not helping when their rental drop too.
Sunday 22nd of May 2011
hi anoymous, i am curious why did you mention it in this post as it is more about insurance. REITs have its good points and bad points and the same can be say about telcos and service companies being very leveraged.