Most of us already know that insurance is very important, and it should form part of our financial plan. However, we tend to shy away from insurance due to its complexity and the lack of understanding of the jargon/terms found in the insurance contract.
We rely on life insurance agents as trusted advisers whose only aim is to get us the right coverage.
About my experience as an ex-insurance agent
4 years ago (2015), I was an insurance agent. I attended trainings, few times a week, to learn how to review insurance policies, understand client’s needs, and help my client to choose a suitable plan. 1 year later, I progress and join a financial advisory firm, founded a financial education company and now a licensed financial planner. During this period, I have reviewed more than 2,000 policies for my clients and members of the financial education company.
Majority of the training that was given to me when I was an insurance agent still stands true, protection always comes first before we even think about investing, but….
After 3 years of experience leaving the tied-agency model, I notice that most of our training are revolving around the products of the company. Whenever the company releases a new product, I will attend a new training, and start to look for clients to sell this product to.
I cannot deny the fact that most of these trainings in some way do bring value to the community. Without insurance agents, the country’s insurance penetration rate would be much, much lower (Insurance penetration rate in Malaysia is currently at about 50-60%).
The curse of concept selling
Looking back, I wasn’t practicing holistic and comprehensive financial planning. I was taught to cherry-pick certain needs of my client to suit the company’s product. This is called concept selling, and here’s a few examples of how we do it:
- Income Protection
- Spouse’s living expenses protection fund
- Children education protection fund
- Retirement protection fund
- Parents’ living expenses protection fund
- Children business start-up capital
There’s probably a few more that I missed out. To a layman on the street, it may seem like there’s always a need to buy insurance.
Last October, I met up with a nice lady in her mid-forties. To my surprise, she has 39 different insurance policies, some are saving plans but majority of them are whole-life insurance. It is common for a high net worth family to have these many insurance policies, but very rare that all these plans are for just one person. I asked her why she needs that many insurance policies, apparently her agent painted her a picture that she has many needs that are unprotected.
Coming back to the list above, on the concepts of why we need insurance. If we stop for a second and think about it, we only need the first protection on the list – Income Protection.
Insurance company will pay out claims only when unfortunate event happens, if not, we have to use our own money to fund these “needs”. Since these “needs” comes from our income anyway, if we can protect our income, we basically protect every other aspect listed above.
Of course, I may be oversimplifying insurance planning, especially when it comes to the calculation/projection of future income and the types of claims (Death/TPD/Critical Illness) as it requires someone with suitable skill and knowledge. However, the point I want to bring to you is that, there’s only one reason to buy life insurance, i.e. to protect your income/asset.
Do we need an insurance to cover our entire lifespan?
Sorry if this seems like a convenient answer. Let me explain.
As mentioned in the section above, the purpose of purchasing insurance is to protect our income or asset.
Most of us expect to retire at a certain point in our life (or at least retire from a regular day to day job). If we retire, do we need an income protection plan? Most agents will argue that we still need insurance for emergency needs. However, that is just one-dimensional. A good financial plan should incorporate aspects beyond insurance.
When you are young, start building your investment portfolio and passive income. Having a passive income means you will still get paid no matter you’re healthy or not. Building your investment portfolio is equally important. Yes, I know some agents will think that investments are risky, but no one’s stopping you from reviewing and re-positioning your investment portfolio.
I usually advice clients to get a term-life insurance, covering till the age of retirement. Term-life insurance is less expensive than a whole-life insurance because there’s no cash value upon maturity. With the difference in premium, clients can invest in other asset classes that have a better yield. Warning, the difference in premium must be invested and not spent without proper planning.
So, if you have a long way to go before retirement, you may consider to only protect your active income until you retire. Get a licensed financial planner to run the simulation for you.
But I get nothing back upon maturity
Some agents argue that your money is “burned” if we buy term-life insurance. These agents fail to understand the fundamentals of how insurance works. If you purchase a whole-life insurance or an investment-linked policy, there’s a “Cost of Insurance” that cannot be ‘refunded’. You get your ‘return’ because you pay way more than a term-life insurance.
My point is this, there’s better investment opportunities out there. With the help of fintech companies, investing has never been easier. You can also get a licensed financial planner to plan your investment strategy.
How about insurance endowment/saving plan?
Short answer: No!
A typical saving plan from insurance companies usually only gives us about 3-5% effective rate of return. To make matters worse, these saving plans usually ties our money down for 10-20 years, if not, there will be a cost of terminating the policy.
I have personally encountered insurance agents telling me that their product gives me a return of 8% on average. But the 8% return is not the effective rate of return, it’s a completely different comparison and cannot be used to compare with other saving/investment vehicle like the rate from Fixed Deposit.
So how do I plan my insurance?
Sorry to disappoint you that a proper insurance planning is still complicated and relies a lot on different aspects of finance such as your personal financial position and investment habit. However, as a general advice, you only need these 3 types of insurance:
- A good medical card
- Personal accident coverage
- Income protection life insurance
With these 3 types of insurance, you should be sufficiently covered as far as life insurance is concern.
If needed, get someone that is unbiased and experienced to do a proper insurance review and planning for you. You may be surprised on how much you may end up saving. Here’s some tips on choosing the right Financial Planner.