Saturday, August 27, 2005

Reduce your life insurance premium

Your life insurance agents will not tell you this. He probably hopes you will never find out.

How to cut your life insurance premium for more than 60% from RM1800 per annum to less than RM663 per annum without compromising your real protection needs? Here's how.

I called my friend, who works as an life insurance agent for quotations. I gave my profiles and details.
Profile : male, non-smoker, healthy, age? young :-)
Insurance coverage: RM50,000
Period: 30 years

He recommended
Investment-linked life insurance
Premium: RM1,800 per annum
Benefits: RM50,000 coverage, level coverage, crisis cover with critical illness, investment value at RM245,745 upon 30 years maturity

After much drilling and pestering, reluctantly he gave me further quotes
Term life insurance
Premium: RM662.50 per annum
Benefits: RM50,000, level coverage, crisis cover with critical illness, 30 years term life without cash value or investment value

I told him that he can do much better than that. Finally he quoted
Term life insurance
Premium: RM283.50 per annum
Benefits: RM50,000, reducing coverage, without crisis cover on critical illness (oops!), 30 years term life without cash value or investment value

This is the explanation:

1. First thing first, why I don't need investment-linked products?

I don't have to stuck my investment with one insurance company. I do my own investment outside an insurance products. I can choose my own unit trusts , stocks and properties. I can decide when to invest and when to stop.

Just think. Between the first two policies above, with annual premium RM1,800 and RM662.50, there is a big difference of RM1,137.50. Why can't I invest this amount elsewhere? Why should I stuck my long term investment with one insurance company?

To pay extra RM1,137.50 annually for the next 30 years would earn me a lump sum of RM245,745. A quick calculation shows that the annual rate of return is 11.43% for 30 years. Is it good? Yes, a consistent 11.43% ROI for 30 years is fabulous. But this is pure guess and estimation!! The agents and the insurance company cannot guarantee such return! Just like any other investment, there is no guarantee here. You may end up with RM1,000 instead of RM245,745 after 30 years.

"This is our fund managers' historical performance", my agent friend argued. Sure, what if your fund manager leaves? Is he going to stay in the same company for next 30 years? If I ever invest in a managed fund, I will move my money to follow a good fund manager. Investment-linked life insurance policy does not allow me to move out from this investment commitments without incurring expenses.

2. Why I don't need Whole Life insurance policy?
Because there is NO such thing as whole life coverage!! I will have to pay extra premium every year as compared to term life insurance. This extra premium is my savings in the life insurance. After 30 years, the extra premium I would have paid and its return (usually at a rate equal to fixed deposit rate) would be accumulated to a large sum. Anything happen to me then I will get paid, sure, not from the insurance element of the policy but from the savings element of the policy. (Hey, that's my own savings and not "benefits" from the insurance company.)

"But after several years you don't have to pay the premium for whole-life policy", my friend reminded me. Off course I don't have to pay then because whole life insurance policy makes me pay the extra premium up front!!

So what makes it look like a whole life protection is that such "financial protection" actually comes from my own savings. It is from the extra premium that I paid. So call "whole life" is truly misleading.

3. Why I don't need level coverage?
From level coverage to reducing coverage I could cut down further RM379 premium (RM662.50 less RM283.50). For level coverage, my life insurance coverage stays at RM50,000 for the next 30 years. For reducing coverage, my life insurance coverage will reduce every year from RM50,000 right up to NIL at the end of the 30 years.

There are specific reasons why people usually need reducing but not level coverage.
  • The purpose of life insurance is to protect the loss of future labour income. When we get older our remaining working days reduce and therefore "future labour income" to be protected reduce, too.
  • We would have built sufficient financial assets that could replace our labour income, therefore less coverage required.
  • Our dependents would have grown up and become financially independent from us
  • Buying level coverage policy, generally, addresses your life insurance WANT, i.e. you WANT to leave RM500,000 to your family in case anything happen to you regardless your actual earning. Buying reducing coverage term life addresses actual insurance NEED.
  • More reasons on reducing coverage here.
4. Why I stick to level coverage? Frankly, I didn't want to. But I need the crisis coverage.
The only reason why I could not reduce further to opt for the reducing coverage policy above is because the policy does not have crisis cover. Crisis cover for critical illness is too important to sacrifice for cheaper premium. Well, this is how insurance companies force us to buy what we don't need (the level coverage) by bundled it with something we must have (critical illness coverage). (sound pretty bitter here. :-) )

Edited: There is one general insurance company in Malaysia, American Home Assurance, that insures critical illness only, without attachment of life insurance. In such a case, I can choose the last option with premium RM283.50 and buy RM177 critical illness RM50,000 coverage from AHA. In total RM460.50 premium per annum, a reduction of 74% from the first option's RM1,800 or a reduction of 30% from second option's RM662.50.

5. Isn't it good if we can get back some cash value after all our payments?
We must know that WE DON'T GET BACK WHAT WE PAY FOR PROTECTION. Insurance is an expense, regardless whether it is term life, whole-life or investment-linked, life insurance company WILL NOT pay back the premium that goes to financial protection. We only get back the extra premium paid that goes to savings or investments.

If you understand the essence of risks management, focus on protection needs (not wants), and have your own plan in growing your financial assets (e.g. properties, shares, deposits, etc.), life insurance premium can be dirt cheap.

If you have been buying investment-linked, in your next life insurance policy, you can either cut the premium down by more than 80% or quadruple your coverage with the same premium. :-) You can now using the extra premium that you save to pay for higher coverage.

Part 1: Reduce your life insurance premium
Part 2: Reduce your life insurance premium (2)
Part 3: Reduce your life insurance premium (3)

Other web resources
Read what the expert says about life insurance, Term or Whole Life?

15 comments:

  1. Ask ur agent about the long term saving, accumulates and bonus!

    You don't really understand those terms and conditions do you? (no offence)

    ReplyDelete
  2. Hi Kenny,

    Well, I do know quite a fair bit of long term savings and bonus...etc. ;-)

    All insurance agents like to talk about this, however knowing such terms and conditions does not help buyer to choose a better product because such info does not enable comparison. It does not enable buyer to compare apple with apple.

    The important information for buyer's decision making are:
    1. Annual premium and the estimate pool of savings at the end of the plan.
    2. Annual premium of another identical plan, but without the saving/ investment elements.

    With this, buyer can find out the true cost paid for the savings/investement element. With the number of years and estimated pool. Buyer can calculate (using Discounted Cash Flow method) the annual compounding return of the extra premium paid.

    I reckon, not everyone know how to calculate this. I will try to put the calculation in an Excel file for free download. It should help both buyer and honest insurance agents. (Thanks, Kenny for bringing the issue up.)

    However, before buying into whole life or investment link, we should consider this: why should we tied down our savings and investments with life insurance plan? We can always save our money in banks and invest in stock or unit trust separate from our insurance plan. This gives us better control of our own finances. An honest insurance agent would reckon this.

    Thanks Kenny, I am glad you asked.

    ReplyDelete
  3. Hello Chen Tong,

    It is with great admiration that I am thanking you for your willingness to have your views and experience written on a blog, which helps people like me to understand better about financial management.

    Anyhow, what if I were already tied up to a whole life insurance? I assumed the common and utmost issue among people is, how and what has to be changed?

    Cheers!

    ReplyDelete
  4. Hi, thanks for writing...

    First thing first, in a specific financial situation like this, the right answer depends on a person situation. I cannot advice. Not just because of Bank Negara's rules (that require advisor to have licence), but also because I could not possibly know your specific situation.

    I can only share my own experience. I do have such "whole life" insurace which I bought when I was very young. Since I knew I would probably lose out if I stop the insurance, I just kept it alive. After more than 11 years payment of extra premium, it finally reaches a level that I don't have to pay for the premium. (Mind my words, "after 11 years of extra premium", these are advance and upfront payment, for me not to pay premium in later year...really not a good deal.)

    :-). So, in my case, I did not stop paying it until my savings (in the insurance) is sufficient to pay my later years' premium.

    ReplyDelete
  5. About investment linked, i know you can invest in alot of places like unit trust and stock properties. But if investment linked can give a deccent return and provide protection as well, why not? Insurance is almost always a long term plan, invesetment too is also a long term plan, what is so bad about it? Most unit trust company give out decent return in the long run, what wrong in investment linked?

    No offence intended. Just wanna to have an extra opinion.

    ReplyDelete
  6. I strongly disagree with you about redusing coverage. When your older and struck with critical illness, you need more money. Why would you want it to reduce? Even your investment are doing quite well, why waste your investment and let it pay your medical bill. Isnt it better to let the ins. comp. to pay you? Isnt that a wiser use of your money? Are u looking for cost or looking at the value? If you get critical illness at the 30th year, what happen if you bought a reduing coverage? How bout the 15th year? Can you clarify the justification use of reducing coverage for critical illness if there is one?

    ReplyDelete
  7. "But if investment linked can give a decent return and provide protection as well, why not?"

    …the question is not "why not?" but “why should I?"

    There are unit trusts, stocks and many other investments available elsewhere which you even stated it in your first sentence. Many of them give as good return as (if not better than) investment linked. Therefore why should we tie our investment down with an insurance plan? I thought the answer is just so obvious.

    For instance, if we invest in any investments other than investment linked, I can decide to take my entire money out to pay for down payment to acquire rental properties. If investment linked gives me the flexibility to withdraw or increase my investment just like other unit trust funds, I have no problem with them.

    The question is not “why not?" but “why should I?" when good investment opportunities are abundant. Is investment linked the only investment opportunity available? Why should we accept insurance companies’ conditions to tie down our money and investment with them? And if investment linked is the only investment opportunity you know, it is time to open your eye to see the whole wide investment world. :-)

    Sure you can have your extra opinion in the comment. Though not really friendly at least you are sincere in writing what you believe. However, an opinion carries no weight unless the person who expresses it sticks his/her neck out for it. An “anonymous" opinion carries very little weight. So add some weight by stating your name, or at least your nickname. :-)

    In a more serious note which put the entire industry practice in question is that bundling investment and insurance in one package can be very confusing to consumers. Many consumers who need, for instance, RM300K protection ended up buying RM100K protection plus RM200K investment linked. They sacrifice what is really needed to protect their family to trade for some investment returns in future. In my opinion, therefore, insurance should never be mixed with investment. There are of two issues and definitely should NOT be in one package.

    However, I also do not deny the fact that investment linked has its value due to its force savings nature. It is good for many people who need to force themselves to save. :-)

    I am writing a post on your second comment.

    ReplyDelete
  8. This is my response about a reader's comments on reducing coverage. It is applicable to even critical illness.

    ReplyDelete
  9. I somewhat agree with you. A lot of insurance company are making money from the protection aka protection that never really protects the policyholder. I have found one company, Takaful Ikhlas, which give a high protection for term coverage with a small premium. But must request a few time from their agent. Because the first agent I asked didn't know, policyholder can take term up to 5 times the basic sum insured. Had to find the info myself. I look at other company policy as well. Most will suggest investment link. Also they are quite cheap as I compared to BSN Pru, which did not provide term coverage. And open to non muslim.

    ReplyDelete
  10. well, this is 2005 post but I would like comment here is

    it is really depends on personal discipline especially on investment and saving. If a person really very self discipline in investment and saving, I would say based on regular ROI, term insurance is better choice for him or her.

    But based on 80% (bell curve) most of people would not self discipline to do this kind of saving/investment, people like to spend rather than save money.

    So what the insurance company "promote" is use your own money to "displine" yourself on saving and investment and you pay for service. This a kind of fair deal......

    ReplyDelete
  11. I think this guy is just plain stupid. Dont even know what his talking about. Most people think they are very knowledgeable in term of insurance but they dont and you one of them. They are never been force for client to take the investment link product furthermore now investment link can be withdraw anytime and any amount. like i said you dont know what u're talking. please learn to read before posting. thank you

    ReplyDelete
  12. Calvin Soh Soon Kee (AIA)October 2, 2009 at 8:47:00 PM GMT+8

    Insurance is used to cover against our liabilities + committment towards our dependents. I am sure that will increase through age 25 to 55. It is amazing how you can use a reducing coverage for this purpose. Reducing critical illness coverage when cost of medical is rising??? I guess Chen Tong doesn't really have a full scenario of life uncertainties when he wrote this blog. So sad that some "Tom, Dick & Harry" tries their best to be a self proclaimed Financial Planner only to leave behind debts & expenses for their families. Unless you can be certain of what will happen tomorrow, all that Chen Tong wrote is BULL.

    ReplyDelete
  13. Buying insurance is for coverage of own risk in future, however, if some one just listen to the agent and follow to buy as per quotation, then if the agent doesn't really know your financial condition and needs, you may be end up with financial burden if nothing happen or claim. Please analyze by yourself thoroughly before buying based on your individual needs and ability to support it for long term. thnks

    ReplyDelete
  14. Hi Chen Tong,

    Thank you for your posting. I find it very insightful and beneficial for consumers as they are many insurance agents out there who are not offering what's best for the clients.

    I've recently got a level term life insurance for myself and asked my mom to cash out the cash life insurance she has for me (though not much after paying for this policy for decades) and invest it somewhere else. She also just realize she has to pay interest to "borrow" her own money from the policy too!
    She's furious, especially the lady who sold the insurance to her was a good friend of hers. --- none of those details were transpired when she signed the policy. She trusted her friend was selling what's good for her/me. what a shame.

    I agree with most of your points. The only thing I'd like to point out that I would advise to stick to the level coverage (regardless of critical illness) as we need to factor in the inflation rate and increasing living cost as well.--just to be on the safe side if the premium doesn't shoot up like crazy.

    In replying to one of the Anonymous's comment to have consumer do all the research themselves. It's indeed very confusing for general consumer who doesn't know much about insurance to do the research themselves; to understand the industry jargons, policy details.

    However sadly with so many agents out there prioritizing their commission over customer's interest, consumers are in a vulnerable position to be properly informed. --not all of them can do research online and read all our blogs..:) Until one day we get a lie detector to come with the insurance agent, consumer has to stay aware and alert on what they are signing at the dotted line.

    I'm sure you'll get egged by the whole/cash life insurance agents out there for spreading the word.. good luck, and be safe!

    Cheers, Ally

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  15. ultimate post man.
    i have never read such a post which shapes my investment
    thanks a lot
    again thanks.
    life insurance australia

    ReplyDelete

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