Are we paying too much for INSURANCE?
ONE thing is certain. Consumers are getting more discerning.
Take administrative officer Eng Lang Neo, 30. Last month, she had a baby girl. Her insurance agent called to see how she was doing.
At the same time, he discussed an education policy for the child.
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It is a regular-premium endowment that bundles two policies: An investment for the child and life insurance for the parent.
Ms Eng will pay $100 per month for 20 years. At maturity, it should be enough to pay for her daughter’s education.
Ms Eng said: ‘I purchased an education policy right away with our first daughter also for $100 a month. This time, I am not so sure.’
She is right to hesitate.
For one thing, costs are high, especially for regular premium insurance like the education policy she is considering.
It isn’t well known, but you can get the same thing without the high costs. There are two ways. The simplest is to buy term life insurance plus a unit trust.
A less simple way is a recurring single premium, which is monthly purchase of an investment-linked product (ILP). It is like a unit trust but sold mostly by insurance companies.
Insurers discourage purchase of investments and term life insurance separately.
Their standard line is: ‘With term, you don’t get anything back at the end. With a whole life or endowment policy, you can cash it in after 10, 20 or 30 years and earn a profit.’
This is correct. But all else being equal, you get a higher return from a unit trust or ILP, even after you subtract the cost of the term life insurance.
It is mostly because whole life and endowment policies have sky-high distribution costs which hold down returns. Unit trusts and ILPs do not.
A word of warning: Single and regular premium ILPs may look similar, but they are not. One is cheap, the other isn’t.
To avoid confusion, it may be easiest to simply forget ILPs, especially if the regular savings feature is important to you. Regular premium ILPs charge a lot for it. Unit trusts provide it for free.
No one knows for sure how much we have invested in whole life and endowment policies.
I have estimated this number. It comes to a whopping $50,000 per household. (See report on right.)
That makes it Singapore’s second most popular investment, after our home. The only problem is the costs are high and it is not a particularly good investment.
Still, as Ms Eng told me: ‘I like to have someone handle these money things for me. I am not good at it and I don’t like it either.’
If she learns to invest on her own, she could save a lot of money. But if she doesn’t like it, she doesn’t like it. As we say in Singapore: ‘What to do?’
Considering the high costs, the verdict is mixed. Whole life and endowment policies are right for some people but not for others.
Considering transparency, it is a different story. People do not have a complete picture of what they are buying.
Most of the time, they are not even aware that information is missing.
While high costs are forgivable, lack of transparency is not. A fair thing to do would be for insurance companies to reveal all.
Then, on the basis of the new information, let policyholders decide whether or not they want to keep their policies. Exactly what is missing? I will tell you next week.
Insurance second largest investment
DO you own a whole-life or endowment insurance policy?
Everyone seems to own at least one of these. But there is no hard data on how much we have invested.
I set out to learn the answer.
The Monetary Authority of Singapore (MAS) website shows $69 billion of non-ILP assets for all insurers.
I multiplied it by the ratio of annual premiums for whole life and endowment to all non-ILPs (0.83) as follows: $69b x .83 = $57b. To be conservative, I scaled it back to $50b.
I checked the figure using a different method and data from NTUC Income’s 2005 annual report. It comes to within 3 per cent of the answer using MAS data.
Dividing $50b by our 1 million Singapore households, we see that the average household owns $50,000 worth of whole-life and endowment policies.
That is huge. It shows much of our wealth is invested in these two very popular but rather expensive insurance policies.
It is our second largest investment, just after our homes.
A worthwhile bit of follow-up research would be to obtain equivalent data for other countries. My guess is we are at or near the top in the world when it comes to ownership of whole life and endowment insurance policies.
Related posts:
- Achieve Top Position in Insurance
- Whole versus term life insurance discussion on Bogleheads forum
- How to convince a savvy customer to buy life insurance policies from you
- Term Life Insurance to solve the problem of Singaporeans Underinsured? The problem is the Agents and the Insurer!
- Decreasing Term Life Insurance can be your low cost insurance solution
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