Some of us were first introduced to insurance while in primary school. In those days, we could opt in to some group insurance plan. The coverage was basic and the cost extremely low at about $3 per year. This taught us an important lesson. Getting the right insurance is important, and worth paying money for.
We understood these as kids. Surely we would understand it when we became adults?
People Don’t Like Paying For Insurance
Studies conducted over the past years in Singapore has shown that many Singaporeans are underinsured. One of the reasons for that could be that people generally don’t like paying for something that they may not get anything out from.
When we pay for a product or service, we get something in return. Buying an insurance policy is different. We buy it hoping that we never have to claim from it.
Educating people about why they should spend money to buy insurance that may not give any return is not easy. It takes time and knowledge to explain it it. Patience is required to answer any question that a person has.
It does not help that most insurance agents are remunerated based on commission. An agent who sells more policies at a higher premium would earn more money.
This creates a potential conflict of interest situation. An agent may prefer that you to opt for higher premium plans such as Whole Life Insurance or Investment-Linked Policies.
Read Also: The Ugly Truths Of ILPs
Conflict Of Interest – Should I Sell You Cheap Coverage You Do Not Want, Or Expensive Coverage That You Want?
Plan 1: Term Life Insurance
Imagine for a minute that you are an insurance agent. You are talking to a couple who are expecting a child soon. You start explaining to them about why they should spend money to buy term life insurance today. This adds up to about $400 a year, for $200,000 coverage of one person.
While the couple agrees that some life insurance coverage is good to have, they hesitate. They reason to themselves that spend $400 a year per person on insurance is not cheap. They have other needs as well, including financial goals such as saving money and getting better returns in the long run.
You, the agent, having already spent hours educating them, decides to take a different approach to close your sale.
Plan 2: Whole Life Insurance
Instead of spending $400 a year on insurance, the agent now proposes a “saving plan” instead. This plan requires a contribution of $4,000 a year over the next 20 years. At the end of 20 years, the annual premium to be paid ceases, but the plan continues to be in effect.
If a policyholder were to surrender the plan after 20 years, he or she may get back the amount that was put in. Hold it for a little longer, and the returns may become higher. This plan also provides the same $200,000 life insurance coverage as well.
You End Up Paying More
On the outset, plan 2 looks impressive. Not only are you committing your money to a saving plan that may have some returns in the long run, but you also get the “free” insurance coverage that you were looking for initially.
What we don’t realise is that due to our reluctance to spend money on insurance policies that provide no returns, we sometimes end up spending much more money on policies just because it has cash value. In our case, a person who could have bought insurance coverage at $400 a year end up paying $4,000 for the same coverage, plus the cash value.
Think about it: the extra $3,600 that you did not put into the more expensive policy could be used instead for investing. Yes, the $400 you spent on a term policy would be lost, but the additional $3,600 can be used to generate higher returns that would cover what you would had received from the saving plan anyway.
Don’t End Up Overpaying Just Because You Are Not Willing To Pay
Insurance should always be a necessary expense. Setting aside 1-2% of your income just for insurance would be a comfortable amount. Ask a trusted agent on the most comprehensive coverage you can get for the amount of money you can spare. Consider the policies being proposed to you, but don’t expect a return from them. They are insurance, not savings or investment plans. You shouldn’t expect your insurance plans to pay for the insurance that you are getting.
Your problem starts when you decide you will scrimp and save on buying insurance policies, only to end up paying as much as 10 times more on a different policy, just because it came with a saving or investment component.
So do yourself a favour and stop expecting your insurance policies to generate a return for you. Chances are, you will be disappointed.
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