Insurance and You - The Three Big Fallacies
Fallacy #1: Insurance is for savings and investments
The insurance industry has successfully indoctrinated the public into accepting that insurance should be used for savings and investments. This idea cannot be farther from the truth.
Often, when insurance agents prospect us, they would pitch by espousing the benefits of higher returns in their insurance products (Endowment, Whole-Life, ILPs) vis-à-vis money in a savings account or fixed deposit account. They might start by asking “How much do you save each month?” followed by “Do you want to earn higher returns on your savings?”
By linking the positive perception of savings and tapping on the greed of prospects, they have turned many unsuspecting prospects into their clients. Years later, if clients want to withdraw their “savings”, they might be told that they would suffer a "penalty" of a certain percentage.
Clients would not have much recourse since they had agreed to the insurance contract.
Truth #1: Insurance is a risk management tool
Insurance is simply a risk management tool where, for a small outlay (called ‘premiums’) the user can transfer the financial risk of a catastrophic event to the insurance company. The concept of insurance is similar to gambling; if nothing happens to the insured (‘player’), the insurance company (‘house’) pockets the premiums (‘bet’). If the covered event should happen, the insurance company would pay out the claims to the insured (‘winnings’).
By confusing consumers on the true functions of insurance, many insurance agents get away with selling high premium, high commission products to their clients. Successfully selling such products ensures that they are well fed, enjoying fat bonuses and overseas incentive trips all at the expense of their clients.
Always remember, insurance agents do NOT earn from their misleading professional advice, they ONLY earn by selling you their company’s products. You know what they say about free advice - It’s worth exactly what you paid.
Fallacy #2: Get yourselves well protected by spending as much as you can on insurance
Insurance agents might say that a person’s insurance needs are unlimited. In financial planning, there are established models that professionals use to quantify the insurance needs of an individual.
In fact, spending more on insurance does not necessarily equate to comprehensive coverage! Read the account of a lady who spends $1,000/month for three critical illness policies and she couldn’t even claim on a single one when she contracted early stage cancer.
READ your insurance contract. KNOW what you are covered for!
Truth #2: Get sufficient insurance by using less than 10% of gross income only
By propagating Fallacy #1, insurance agents can easily get away with encouraging consumers to spend much more on insurance. Following Truth #1, Insurance should never be treated as an asset; it should always be treated as an expense!
Think about it, would you want to spend majority of your income preparing for events that are statistically unlikely to happen? Of course, unlikely doesn’t give us the excuse to ignore wealth protection.
A balance must be sought when budgeting for insurance. Not too much, not too little. Personally, I am currently only spending around 5% of my gross income for sufficient insurance coverage.
Fallacy #3: You need insurance FOREVER
By the time Singaporeans reached retirement age (currently 62 years old), they should have minimal financial obligations; mortgages are paid off, children are financially independent etc. Life insurance will no longer be a necessity at this stage.
Furthermore, the cost of insurance rises at an exponential rate after age 60 due to a higher probability of death. This means that insurance loses its cost-efficiency as a risk management tool going into our retirement years.
Truth #3: Insurance needs vary throughout your lifetime
Our insurance needs differ according to life stages.
For example, a sole breadwinner supporting a family of four would definitely need more life insurance than a fresh graduate who just joined the workforce. Pre-mature death of the sole breadwinner would be catastrophic, as the widow would have no income to rely on to raise her school-going children.
Life insurance needs will typically peak when one is raising young children and paying off huge debts such as mortgages and car loans. As children grow up and debts are progressively paid off, the amount of life insurance required decreases accordingly.
In summary:
(1) Buy insurance for wealth protection.
(2) Spend less than 10% of your income on insurance.
(3) Analyse your insurance needs before committing.
Fallacy #1: Insurance is for savings and investments
The insurance industry has successfully indoctrinated the public into accepting that insurance should be used for savings and investments. This idea cannot be farther from the truth.
Often, when insurance agents prospect us, they would pitch by espousing the benefits of higher returns in their insurance products (Endowment, Whole-Life, ILPs) vis-à-vis money in a savings account or fixed deposit account. They might start by asking “How much do you save each month?” followed by “Do you want to earn higher returns on your savings?”
By linking the positive perception of savings and tapping on the greed of prospects, they have turned many unsuspecting prospects into their clients. Years later, if clients want to withdraw their “savings”, they might be told that they would suffer a "penalty" of a certain percentage.
Clients would not have much recourse since they had agreed to the insurance contract.
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| Read carefully before signing on the dotted line! |
Truth #1: Insurance is a risk management tool
Insurance is simply a risk management tool where, for a small outlay (called ‘premiums’) the user can transfer the financial risk of a catastrophic event to the insurance company. The concept of insurance is similar to gambling; if nothing happens to the insured (‘player’), the insurance company (‘house’) pockets the premiums (‘bet’). If the covered event should happen, the insurance company would pay out the claims to the insured (‘winnings’).
By confusing consumers on the true functions of insurance, many insurance agents get away with selling high premium, high commission products to their clients. Successfully selling such products ensures that they are well fed, enjoying fat bonuses and overseas incentive trips all at the expense of their clients.
Always remember, insurance agents do NOT earn from their misleading professional advice, they ONLY earn by selling you their company’s products. You know what they say about free advice - It’s worth exactly what you paid.
Fallacy #2: Get yourselves well protected by spending as much as you can on insurance
Insurance agents might say that a person’s insurance needs are unlimited. In financial planning, there are established models that professionals use to quantify the insurance needs of an individual.
In fact, spending more on insurance does not necessarily equate to comprehensive coverage! Read the account of a lady who spends $1,000/month for three critical illness policies and she couldn’t even claim on a single one when she contracted early stage cancer.
READ your insurance contract. KNOW what you are covered for!
Truth #2: Get sufficient insurance by using less than 10% of gross income only
By propagating Fallacy #1, insurance agents can easily get away with encouraging consumers to spend much more on insurance. Following Truth #1, Insurance should never be treated as an asset; it should always be treated as an expense!
Think about it, would you want to spend majority of your income preparing for events that are statistically unlikely to happen? Of course, unlikely doesn’t give us the excuse to ignore wealth protection.
A balance must be sought when budgeting for insurance. Not too much, not too little. Personally, I am currently only spending around 5% of my gross income for sufficient insurance coverage.
Fallacy #3: You need insurance FOREVER
By the time Singaporeans reached retirement age (currently 62 years old), they should have minimal financial obligations; mortgages are paid off, children are financially independent etc. Life insurance will no longer be a necessity at this stage.
Furthermore, the cost of insurance rises at an exponential rate after age 60 due to a higher probability of death. This means that insurance loses its cost-efficiency as a risk management tool going into our retirement years.
Truth #3: Insurance needs vary throughout your lifetime
Our insurance needs differ according to life stages.
For example, a sole breadwinner supporting a family of four would definitely need more life insurance than a fresh graduate who just joined the workforce. Pre-mature death of the sole breadwinner would be catastrophic, as the widow would have no income to rely on to raise her school-going children.
Life insurance needs will typically peak when one is raising young children and paying off huge debts such as mortgages and car loans. As children grow up and debts are progressively paid off, the amount of life insurance required decreases accordingly.
In summary:
(1) Buy insurance for wealth protection.
(2) Spend less than 10% of your income on insurance.
(3) Analyse your insurance needs before committing.
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