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.

More about reducing coverage

When we buy life insurance, there is one important reason why most of us should go for reducing coverage: most of us have limited budget in paying for insurance, reducing coverage gives us higher value of protection as compare to level coverage, at least for the first few years. This makes all the difference if anything happen to us now.

We begin with a simple example. You and your insurance agent calculated that you will need a coverage of RM400,000. But you can only afford to pay for premium of either
a. RM300,000 protection in a reducing coverage term life, or
b. RM200,000 level coverage protection term life, or
c. RM100,000 level coverage protection with RM100,000 savings/ investment (full life/ investment linked)

The logical choice is to buy the term life insurance RM300,000. Anything happen to you now or the next three years, you and/or family will get RM300,000 or close to RM300,000.

What about ten years later when your coverage reduces half to RM150,000?

Risk management is a process to review periodically. Just three years later your financial position would have changed, i.e. you have a higher salary, you have more kids, you have saved more money, you have more investment, you have more ownership in your home, etc. You can decide three years later whether to increase your coverage or to reduce your coverage. You can decide then whether to dump your current policies and buy a completely new plan for your entire protection need or just to buy new policies to top up your current coverage.

Just like corporate risk management, personal risk management requires periodic review. Personal risk management is something you can never do once and say enough.

Using the above method you are going to pay higher insurance premiums through out your life time. Some of the plan you add in your older age may be more expensive. However, you and your family protection are maximized based on your limited budget. You increase your insurance premium and protection when your financial situation improves and when your family grows.

If there is no financial constraint that you are rich enough to buy sufficient protection at level coverage, then you should buy level coverage. However, most of us probably cannot afford the premiums. (Insurance agent would say, "Therefore you should buy more now...since it will be more expensive in the future..." They are blind to say such things. Driven by peers pressure, targets to acheive and group commitments, most insurance agents refuse to recognise our financial limitation.)

Read more about reducing your life insurance premium without compromising protection.

Gambling with your insurance plan?

There is a fine line between hedging your risk or gambling with the hedging instruments. Insurance is for us to hedge against our financial loss upon the occurrence of an event. It is not meant to be used so that we are financially better after the event and the subsequent insurance claim.

When an event strikes, if our financial loss is covered by insurance, this is called proper hedging of risk. However, if not only our loss is covered but we are financially better off from our insurance claims after the occurrence of an event, we are gambling.

If we buy insurance more than what we need, the premium that we pay for just cover our loss is for the purpose of hedging, the extra premium we pay in order to have extra insurance claims is for gambling.

If we buy an insurance plan when we will be financially better off after the strike of an event, the extra premium we pay is just like the money that gamblers pay to 4D, TOTO, Big Sweep, etc. There is no different.

In lottery, you pay the bookie your bet. When the event strikes (you strike lottery) you are financially better. In buying insurance, you pay extra premium (more than actually required to just cover loss) to the insurance company. When the event strikes (though unfavorable), you cover your financial loss (hedging) and have extra money (gambling).

We were usually told (by agents), "Isn't it better if you have extra money after these things happened". Yeah, sure. It is also how gamblers convince themselves, "Isn't it better if I have extra RM3 million if my Big Sweep ticket strike."

This is particularly true in the education fund insurance that you pay for your children future education. Education fund insurance covers child's life. STOP! Why cover child life? Your child has not earned income yet! What financial loss that you are hedging against in the event of your child's death? (Touch wood.) Funeral expenses? It can be minimised, therefore it is not really an issue. So, a family becomes financially better (from the child's life insurance claim) after the death of their child.

This is a unpleasant example, but it illustrates well on the gambling part of insurance. When we pay what we don't need, when we were convinced by insurance agents buying more than covering our actual FINANCIAL loss (not emotional loss, etc.), we are gambling with insurance. No wonder we always feel insurance is expensive.

Critical illness cover

Critical illness cover is one the most important elements of personal insurance. Sometime, it is even more important than the death coverage. For instance, even if you don't have dependent, it is still important to have coverage on permanent disablement and critical illness. Of course, it would be good to have a small amount of death coverage that can cover your funeral expenses.

Life insurance companies understand this, therefore life insurance is designed in a way that we CANNOT buy critical illness separately from death and permanent disablement coverage. We are FORCE to buy death coverage, even if we want to buy critical illness coverage only.

In Malaysia, there is one insurance company offers critical illness cover without attaching it to life insurance: American Home Assurance. It is a general insurance company.

I made a quick check with the company.
Coverage: RM50,000 critical illness for male non smoker
Annual premium: RM84 (Age: 18-35), RM177 (Age: 36-45), RM514 (Age: 46-55), RM1,136 (Age: 56-60), RM1,783 (Age: 61-65)

The plan is worthwhile if you are below 46 years old. For instance, the annual premium for a 25-year-old is RM84 only. By splitting out the critical illness coverage from your life insurance, you can get a term life insurance with reducing coverage. It can cut your entire insurance premium further by half.

You can find American Home Assurance Co.'s telephone number at General Insurance Association of Malaysia's web site (List of Members page, left column third row), which is 2058 5000.

Reduce your life insurance premium (3)

At this point you probably realised that it is your personal lifestyle profile that determine whether you can go for such "cheaper" insurance by not buying unnecessary benefits.

This means if you are the type that is careless with money, have difficulties to save money, don't really care about investing, etc. Such benefits become important to you and it is probably for your own good that you should have at least one or two such investment-linked products inside your beg.

But if you are careful with money, have a good saving and investing plan, etc. You can afford not to pay for such benefits. Keep the change to improve your coverage or increase your investment...

Therefore, am I against insurance products like investment-linked? Not really. It is useful for certain people.


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?

Reduce your life insurance premium (2)

You probably would quickly point out that I did not actually cut down the life insurance price. I did not get a real cheap deal or something value for money. I merely gave up those life insurance benefits, those real good benefits, in order to get a lower price. I was merely NOT buying some elements of the life insurance.

You spot on.

I did not buy those elements that are good, that I WANT. I only buy what I NEED.

They are many benefits that I want from an life insurance product. I want my family to have a wind fall from my life insurance like hitting a lottery upon my death and not just an amount they could get by sufficiently without me. Should I have some critical illness at the age of 65, I want to claim RM500,000 from my life insurance coverage (not my cash value or investment in the life insurance). This is despite the fact that I would have earned less from my labour work if I am healthy. My financial position is actually better off upon this unfavorable event. You see, these are insurance WANTS. You pay a small sum and hope for windfall upon unfavorable events. You are not just covering possible actual loss of income but hoping for more money which you would not have earned if you are healthy. You are not just covering your risks, you are betting for odds.

To have level coverage through out the term of the life insurance, knowing that I will cumulate financial assets, is a WANT.

To put in more money in investment-linked that gives me unit trust return, no point. I am investing properly outside an life insurance product. To me, investment-linked insurance is a WANT.

But crisis coverage for critical illness is a NEED to me. I am forced to take the terms laid by insurance company. I am forced to paid a higher premium for level coverage, instead of reducing coverage, in order for me to buy critical illness.

The key idea is that, just don'’t buy what you don'’t need and you will make the hefty savings.

Pause and think. Taking out investment element and level coverage, insurance premium now seems extremely cheap. Why RM50,000 coverage only? It is hardly enough as a protection if you have dependents. By cutting down the unnecessary element in a life insurance product, you are now afford to ensure sufficient 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?

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?