Get Value From Your Life Insurance by Tan Kin Lian
Deductions Should Be Below 20%
The deductions refer to the amount of the accumulated premium which is taken away from the customer. The accumulated premium is simply the amount of premium paid up to the date since the starting of the policy. To find out the deduction, simply refer to “Effect of deduction” which can be found on the benefit illustration in the plan and compare it to the “Value of Accumulated Premium”. If the ratio is above 20%, it is too high. Mr Tan feels that 20% is a justifiable cost for the insurance company to provide the insurance, service, pay the agent commission and still retain certain profits. Anything above 20% is excessive profiteering off the customer and we should be wary. The funny part about the book is that in every Q & A case study, the deduction ratio is always above 20% and hence too expensive, are there any insurance Companies who will charge a reasonable deduction as mentioned by Mr Tan?
Buy Term Insurance and Invest the Rest Yourself
This is one point which I really agree with and is recommended by most of the top financial planners. Insurance is basically for protection and that’s all you need it for. One does not need the insurance policy to provide a savings plan when you can do a much better job yourself. In fact, many of the benefit illustrations only show a guaranteed yield of about 2% or less, the rest being unguaranteed bonuses. An annual 2% yield is barely enough to beat inflation; hence your savings will be worth a lot less 20-30 years down the road when the policy matures. Furthermore, having a savings component typically means more services and hence higher deductions. A term insurance usually provides the most value for money, giving a much higher coverage for the premium paid. The rest of the savings should be invested, easily yielding at least 4-5% annually.
Know the Half Truths That Insurance Agents Are Trained to Tell
Insurance agents go through extensive training to tell half truths, which means they are not lying to you, but they are not being totally upfront either. They will focus on the positive aspects and try to divert your attention from the negative. Some half truths which Mr Tan pointed out which I think is very eye opening.
Half – Truth: A term insurance policy expires after 25-30 years and after that the customer will no longer have any protection.
Counter: We do not need life insurance after 25 years because our accumulated savings will be much higher than the sum insured and more than enough to cover for any mishaps!
Half-Truth: If you buy a whole life policy, your premium is fixed. If you buy a term insurance, the premium will increase when you get older.
Counter: You can get a 25 or 35 year term insurance policy at a fixed premium which is much cheaper than a whole life policy. (I actually didn’t know that, I will try to find out from my insurance company if this exists)
Insurance Agents Have a Conflict of Interest
Insurance agents are paid based on commission and are rewarded differently based on the policies you pick up. Guess what type of policies pay the most commissions? The ones which have high coverage, savings plan and high premiums will typically pay out the most commissions. As such, insurance agents have an interest not to recommend the most suitable policy, but the most expensive and longest policy. However, that being said not all insurance agents operate in such a manner as it is short sighted and will not bode well for insurance agent as a long term career. The worst such cases I have heard are where the insurance agent recommended to her relative an extremely high premium insurance which her relative could not afford to pay after a few years into her career and as such burning a lot of money upon early termination of the policy.
Do Your Own Analysis and Focus on the Guaranteed Portion
It is important to read the benefit illustration carefully and calculate the Net Present Value (NPV) of the payouts in future and compare it to the NPV of the total premiums paid to determine if the policy is worth it. Another way is to calculate the Internal Rate of Return (IRR) of the policy based on the guaranteed portion. It is very important to focus on the guaranteed portion as the non-guaranteed portion is often way overestimated and is very subjective to factors like economics, company performance, stock market etc. It is not a viable number to use for somebody who needs the money to retire since you cannot even estimate your actual payout.
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This type of insurance is usually a yearly renewable term insurance, and the premiums are intended to cover expected benefits and expenses for only the current policy year.
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