Monday, December 7, 2009

Insurance: Protection or Investment?

Insurance should be treated as a protection rather than an investment tool. Insurance provides instant cash to the dependants of the insured, to help minimize the impact of unforeseen circumstances. Therefore, insurance is very important in terms of protection as long as it is not overused.

After reviewing your insurance needs, buying term insurance might be more advisable for instant protection. The rationale behind this is that term insurance is able to provide greater protection at a lower cost. Yes, term policy does not carry any cash value, but ask yourself the following questions:

  1. With bonus cuts, how much cash value can a whole life or endowment policy generate upon maturity? Do you want to pay more premiums to get the same cash value as previously projected, or do you want to lower your cash value projection by paying the same amount of premiums? 
  2. If anything unfortunate happens to you now, is your coverage enough for your dependants to live on?
Therefore, generally speaking, immediate protection is more important than cash value upon maturity. Why bother to pay more and get less?

Past records show that equity and real estate investments provide better returns than any other investment tools. In fact, equity is more liquid than real estate.

When planning for retirement or children’s education, instead of buying an endowment plan, it is more practical to have enough term policy to cover your protection needs and then start equity investments such as unit trusts as soon as possible.

In other words:

  1. After a detailed review of your insurance needs, change to a term policy to get enough protection at a lower cost to save on premiums.
  2. Invest whatever you have saved on premiums into unit trusts or shares that will generate higher returns in the long term by practicing dollar cost averaging.
In summary, realistically set you objectives, and continuously educate yourself to have a better understanding of how each financial tool will help you to:

  1. Spend less but get better protection (insurance planning)
  2. Accumulate enough resources to cater to your financial needs (investment planning)
  3. Have better wealth preservation (tax planning); and
  4. Have effective wealth distribution (will/estate planning).
Of course, most importantly, bonus cuts by your insurer will then no longer be a concern to you.
Posted by LAI SENG CHOY at 1:11 PM
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6 comments:

  1. mrcoolkuDecember 7, 2009 at 9:30 PM

    As I know term policy premium increase with age. Another thing to mention is if you have any diseases, they might reject for policy renewal.

    ReplyDelete
  2. Lai Seng ChoyDecember 8, 2009 at 7:33 AM

    Well, any policy are the same. Its premium increase with age. The only difference is how the premium being calculated.

    For example, for whole life policy, its premium has considered your future high premium charge as well as allocation for investment.

    Therefore, even though you pay consistent premium throughout the policy life, relatively, you are actually paying more when you are young and will be lesser when you are getting older. This is the reason why, the premium of whole life is higher.

    Same for term, the only difference is it does not have investment portion. That is why its premium is relatively more cheaper than whole life. Just assume you are able to invest whatever you premium saved and get 5% return a year, you will be better off than buying whole life.

    I will share my findings more in my future posting.

    Thanks.

    ReplyDelete
  3. mrcoolkuDecember 9, 2009 at 9:49 PM

    I get your meaning now. Term policy is just for protection, no investment included right? Therefore it is cheaper.
    How about the renewal of policy? If you are sick, will there renew your policy again?

    ReplyDelete
  4. LAI SENG CHOYDecember 10, 2009 at 4:35 PM

    Well, for term and whole-life policies, all have fixed tenor. The difference is term policy may cover up to age 70 or 75 while whole-life policy may up to age 99. Both policies will be continued within the tenor (no renewal required) as long as premiums are paid, no matter you got sick in between or not.

    Please note that the premium for term policy is cheap for life coverage only. You may opt for critical illness rider in your term policy. However, what I understand is, its premium will increase substantially. Therefore, you may opt for investment-link. Investment-linked policy covers life and critical illness until the age 99 with relatively cheaper cost as compared with term and whole-life. Of course, if you have pre-existence illness during insurance application, you better declare it clearly to avoid future problem in case of any claim.

    ReplyDelete
  5. mrcoolkuDecember 10, 2009 at 9:07 PM

    I taken an insurance course before during my uni times. If not mistaken, the term policy may be not renewed if you have any disease. Or if they accept you, you gonna pay very high premium.

    I am happy to learn from you. It is better to know more about it before buying any policy. Btw, are you a insurance agent? You know so much about insurance. :)

    ReplyDelete
  6. LAI SENG CHOYDecember 13, 2009 at 5:43 AM

    I used to be 8 years ago. But I dropped as I don't have time to run it. I learned a lot from then about the features of different kinds of insurance. I also know their trick on selling. May be this is why I encourage people to do their own planning through thorough understanding before any action instead of just listening to what insurance agents are saying. They just earn for living, anyway.

    ReplyDelete

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