Desmond Ng

“My adviser said that a term insurance policy expires at the end of the term and after that, I will not have any more life insurance coverage. She said it is better to take a whole life policy as it provides coverage for your whole life…”

This question was posted to the ex-CEO of NTUC income, Mr Tan Kin Lian. You can read more about insurance at his blog at http://www.tankinlian.blogspot.com/.

This was his reply:

REPLY
Most people need life insurance to cover the loss of earnings in the event of premature death. They need the life insurance policy coverage only during their working life. The policy pays a benefit to replace the lost income and take care of the family needs when the children are still young.

When a person retires from work, there is no need for life insurance, as there is no lost earnings to be covered.

If you take up a term insurance policy, you pay a premium of about one-tenth of a whole life policy. This allows you to take a larger sum assured and protect your family more adequately. You need life insurance up to age 65 only.

You will find that a decreasing term insurance to be suitable for your needs. The sum assured starts at a high amount and decreases each year over the term. The premium is less than half of a level term insurance policy. You only need to pay about 5% of the premium for a comparable whole life policy.

Although the sum assured decreases each year, it is adequate for the family as the children have grown one year older, and need to be financially supported for a shorter period. The family would have accumulated one more year of savings with each passing year.

For example, a male at age 30 who takes a whole life policy to cover $300,000 has to pay a monthly premium of $500. This person can take a 20 year term insurance policy covering the same amount for a monthly premim of only $50. For a decreasing term insurance policy, the premium is about $25 a month.

If he takes a 30 year term insurance policy, the premium will be about $100 (for level term) and $50 (for decreasing term). They are much lower than the premium for a whole life policy.

There is another policy, called the family income policy, that pays the benefit as a monthly sum (say $3,000 a month) for the remainder of the term.

Reply by a Reader to this post:

One reason why the agent wants you to buy a whole life, high commission for her. Having an insurance for whole life is not a good reason. Likelihood of you not requiring at 65 is great.
AGENTS WHO SELL WHOLE LIFE HAVE ONE THING IN MIND, THAT IS HIGH COMMISSION AND THEY NEVER HAVE YOU IN MIND or THEY ARE JUST NOT QUALIFIED TO CONDUCT INSURANCE PLANNING.

Desmond says:

If you are still unsure about whether Whole Life or Term, read a more balanced opinion from me here.

“A financial adviser is a professional who renders investment advice and financial planning services to individuals and businesses. Ideally, the financial adviser helps the client maximize their net worth while minimizing risk by using proper asset allocation.”

Many times, people who already have an adviser shuns other planners because he or she feels that there is no need for another adviser in their lives. This is true to the extent that IF & only IF your adviser is currently serving you well and thinking with your best interests. A professional adviser is one who helps you with proper planning and “Be Good but not Nice”. He should be highlighting key areas in your life that needs to be looked at and help you get a better long term return compared to other normal investment vehicles.

It is NOT, in any means, someone that comes to sell you something useful and disappears like a magician. Which means, you may have your friend or relative serving you but they are only helping you minimally because they are salesmen, not advisers.

So what should you look for in a Financial Adviser?

1. Nothing comes for nothing:

There is such thing as free advice. However, remember that if you use the services of an adviser, at some stage they must have some hope of getting paid or of selling you something that pays them a commission. A professional adviser will keep you updated and service you as long as you welcome him to. A salesmen adviser will try for a few months and give up on you.

2. Look for an upfront declaration:

A competent honest adviser will make it clear how they are paid and happily tell you in detail how this happens. Somewhere, somehow, people need to be paid. If it is not clear to you how your adviser is paid, keep on asking. You must understand how they are paid, so you can understand their bias. If the adviser tries to hide costs involve, get rid of him. How can you trust your money with someone that isn’t proud of what he should be paid for? Hiding the costs means that he feels that he doesn’t deserve your money.

3. Plan for your first meeting:

At your first meeting, or over the phone, get straight to the point about your position and what you want. Professional advisers who are successful have good technical skills, but they also have strong people skills. Advice is a personal business and few advisers will be willing to offend people by saying early in a meeting that you are just not the sort of client they want to look after, so it really is up to you to be able to succinctly say, ‘Hey, this is my situation, am I the sort of client you service?’

4. Build a relationship:

The best advisers want to give you ongoing advice and will charge you an annual fee for this. It is important to have an ongoing relationship with your adviser. You want someone who will understand your needs and help you solve your investment problems now and in the future. You don’t want someone who sells you a product, takes the commission and then forgets you. Be very cautious about an adviser who only earns a commission when you buy something. They will only wish to see you on an ongoing basis if you want to buy something or they can sell you something. Frankly, if the ‘advice’ is always free and the adviser only makes money when you buy product, it is very hard to see how you are ever going to get unbiased advice.

5. Be sure they are working for you:

A good adviser should be giving you quality advice that suits your needs - not using you to help fund his or her personal deals. One of the great traps in financial advice is buying deals from the adviser when the adviser is personally involved in the deals. A professional adviser needs to keep a critical eye on your investments. This means that they should not be personally involved. If they have lots of their money tied up in the deal, this may sound like a good thing to you, but it may also cause the adviser to become too emotionally tied to the investment, leading to poor decisions on your behalf.

6. Know what you have got and know what you want:

Don’t expect a professional adviser to waste valuable time trying to work out things that really you only know. Approaching an adviser in a logical, prepared fashion will pay big dividends. The biggest obstacle to finding a professional adviser is not being clear about what you want. So, before you find an adviser, sit down with a pencil and piece of paper somewhere quiet and pour a glass of wine if it helps. Write down all of your assets and liabilities, your income and spending habits. Think about your aspirations for your career, relationships, any dependents and estate planning. List your insurance and your long-term goals. Consider when you want to stop work, how much income you would like to have.

After reading through this, take 5 minutes and think “Is my current adviser like this?”. Weighing the fact that I invested $???? with him, I should be ranked ? in his list, am I getting the right amount of attention? Understand that the higher the amount of assets you have invested with him, the quality of service definitely rises.

Hence, keep looking around for better advisers if your current one doesn’t satisfy you. There are a lot of salesmen advisers out there, but there are also advisers that are honest and acts in your best interest. So STOP SHUNNING them! You never know when you have just chased off a great adviser.

“You buy life insurance for just one reason: to support the people who depend on your income if you die prematurely … you want term insurance.”
Newsweek, January 9, 2006

“To save money, buy term insurance.”
USA Today, October 10, 2006

There are many kinds of insurance products namely Whole Life, Endowments, Investment-Linked and Term.

The latest concept that our knowledge-based economy has started shifting into is “Buy Term & Invest the Rest.”

The phrase “BUY TERM AND INVEST THE DIFFERENCE” evolves around the concept of term life policy which is a basic protection policy and the endowment/ whole life policy which has protection and investment/saving features. To put it simply, the phrase means that instead of taking up the endowment/whole life policy, an individual should buy a term policy for protection and the difference between the premiums of the two policies is to be invested by the individual himself to earn some dividend on the investment.

Let me break down the suitability of this concept for you.

1. Need for Permanent Insurance

The reason for which one purchase life insurance is usually temporary in nature (paying off mortgage and/or debts, provide education for dependants and create cash reserves to replace the income of the breadwinner.) In the event of the insured’s death, many or all of these responsibilities can be resolved using the proceeds from the policy or policies. When the consumer has cash reserves large enough, they consider themselves to be “self insured”. Insurance terms may be a number of years in length (1, 5, 10, 20 years or more) which, in theory, should provide enough time for the insured to invest and eliminate these responsibilities.

Those who believe in buying Term Insurance and investing the difference in premium between a Term and Permanent policy must intend to obviate their need for life insurance, since the Term policy will eventually expire or become too expensive. If they are not disciplined enough to invest, pay off their debts, or assist their dependants in becoming independent, they still have a need for insurance. For individuals with additional responsibilities or an indefinite responsibility, this strategy would not be beneficial.

2. Immediate Accumulation of Wealth

Bundled Insurance like Whole Life or Endowments usually take a number of years before the cash value break even. This is because of the many charges and fees involved. Commission for the agents contribute a large factor to why this policies can hardly see any value in the first few years. By dissecting a Whole Life policy into a Term + Investment, it allows one to have an immediate accumulation of one’s wealth which means a faster return on the accumulation.

However, a problem is that most people tend to forget about investing the difference and end up spending the money saved. Hence, discipline comes in again. If one is not able to maintain the discipline of constantly investing, a permanent investment may therefore play a better role to your financial goal.

There are many benefits of taking a Buy Term & Invest the rest approach. For example, flexibility in amount to save, to withdraw & maintaining coverage even in difficult times.

However, the choice still lies with you. Your decision is a personal one, based on your family’s means, needs, and goals. The insurance and financial decisions you make now are crucial to your family’s future. Consult your financial adviser or me should you require a detailed planning.