Insurance is not a necessity

(Posted Wednesday, 3pm)

The following is just a guide to assist you to determine if there is a need. In the end, the decision is yours finally.

When you buy insurance, you are actually practicing a sort of risk transfer by

·         transferring a potential financial loss to

·         a third party (insurer)

·         Whereby the proceeds will be distributed through a will or by nomination.

The later part of the above sentence is often not debated.

What happens if there is no income to protect? A homemaker or a minor does not earn an income.

It all depends on whether the loss of your loved ones will impact you financially. A homemaker would have economic value. She looks after your home, looks after your children, sends your children to school, cooks a nice meal when you reach home, etc. In other words, in the event of the loss of a homemaker, who would look after the above? Would the replacement impact you financially?

A child does not earn an income. So why do you buy whole life insurance for your child(ren). Your response is that there may be a need for child education funding or hospital and surgical (H&S) expenses. I am here to clarify. Then your child is NOT buying life insurance. You are actually transferring your financial risk for child education funding or related H&S expenses. A whole life plan does NOT provide child education nor H&S benefits.

I am very worried that the audience has a whole wardrobe of clothes for display and may not have the appropriate combination for a particular function. In other words, buying prescription for the wrong reason.

What sort of questions do you need to think about before meeting your insurance agent or financial planner?

1.    What is the objective of buying life insurance?

2.    Is this to protect the potential loss of your income?

3.    Who are my dependants or beneficiaries?

If you do not have dependants or beneficiaries, it is obvious the financial benefits will go to you (self). In other words, you are buying life insurance for one’s own interest.

You could be single, not married. You may not have siblings, dependants or children. Then what sort of insurance plan would meet your criteria? An endowment plan, whole life or term plan?

·         Would a term plan (low cost, high protection) with Total & permanent disabilities and/or terminal illness benefits suit you? Low cost

·         Would an endowment plan suit your needs for high protection in the event of disabilities or terminal illness? (This would be the highest cost) Or

·         Would you choose a whole life plan even when you’re single with no dependants or beneficiaries? Your answer could still be Yes because it provides cash values while a term plan does not. However, would the difference in premium between a whole life plan and a term be better use elsewhere in your financial planning?

In other words, did you consider financial planning and budgeting? You may chave to consider your budget at the next financial planning stage, like a comprehensive hospital and surgical plan with ‘as charged’ benefits, long term care income, disability income, supplement your retirement planning. While paying more for a life plan, you may have fewer budgets to address other financial needs.

There’s no right or wrong answer whichever you choose. What is more important is that the fact find process would result in a list of goals with priorities (with your adviser) and due diligence is provided to assist you to make a decision. That’s why the ‘fact finds’ or ‘know your client’ questionnaires is an important process.

The above is NOT a discussion about whether term, endowment or whole life is a better choice. There is no right or wrong answer. The main point is ‘do you see the importance of a comprehensive fact find and financial planning process’? Well the benefits is certainly obvious – a complete financial peace of mind!

(Penny for your thoughts.

An honest and totally unbiased financial planner is certainly hard to come by. It is again, sad to say that life insurance agents do not qualify being unbiased because they can only market their own products. What if they don’t have the products? It is obvious, the fact find forms don’t address those concerns.

Take long term care income as an example. There are only three insurers out of ten insurers addressing long term care concerns. If you are not connected with these three insurers, your insurance agent would not have discussed long term care concerns with you. Hospital and surgical plan in another area where not all insurers in Singapore provide. Hence, is there a complete fact find process?)