Saturday, July 16, 2016

Should we buy insurance with saving plan?

This is the advice from Yap Ming Hui, a well-known financial books author and financial planning practitioner, to his client on buying a life insurance with saving plan:

“Mr Tan, why don’t you optimise what you have by buying a term insurance policy for a smaller premium to cover you for the same amount?”

“You can always invest the difference in an investment that can earn you a return of up to 8% per annum. You have been achieving that kind of return for your liquid investments for the past 10 years. At the end of 25 years, you will get something like RM1,153,439.”

I agree with him. If you know how to invest responsibly and wisely in rental property and dividend stocks, there is no reason why you want to buy a life insurance policy with saving plan or investment linked insurance.

Life insurance that comes with saving or investment plan force you to save. Its premium is much higher that the one without saving or investment element. You will get back the cash value upon maturity of your plan. If you are not good in saving and managing your finances and are not keen to learn to invest, such saving plans can be helpful. The first insurance policy I bought when I started to work came with saving plan. It forced me to save at young age.

But there are two very important issues:
  • The returns of such plans, in general, are really bad if you compare them with a good investment in property or good dividend stocks. These extra insurance premiums you pay for saving element could have earn you much higher returns if you invest them in rented property or dividend stocks.
  • When you have limited income, the premium you pay for saving element reduces your ability to pay for higher protection. Without saving plan, the same amount of insurance premium your pay can give you much higher protection amount. For a more detail explanation, read "Reduce Your Life Insurance Premium".

The answer to whether we should buy life insurance with saving plan simply depends on

  • whether you are savvy in financial matters. If you are a discipline saver and a good investor (or determined to learn to be one), don't bother to buy such life insurance policy with saving or investment plan. Invest the difference of premium in property or dividend stocks.
  • money you can afford to pay for the protection amount that your family needed if anything happen to you.