Insurance & Costs of having and raising a child

[Traumfanger]

Sometimes discussion can get muddled. I was talking to him then about ILP. But apprantly he was talking about endowment. So I think I misunderstood him.

If that's the case, then an endowment policy is better than ILP? I know whole life is not really needed as we can get covered via term and prudent investing.

An endowment policy is simply a whole life policy with even more of the money put into investments. It is an even worse idea than a whole life policy. And before you ask, an education plan is just another name for an endowment policy.

Crudely speaking, ILPs exist because the insurance industry needed to come up with something to fight the "buy term and invest the rest" tide. So they created ILPs where there was still a pretense of insurance coverage in order to legally sell them as insurance products, when in fact the selling point is that ILPs are primarily investment products.

It should be obvious from the pathetic insurance coverage (typically 125% of the premium invested) that very little of the customer's money is paying for insurance. Contrast this with term plans where $1 can often buy $10 or more of coverage. If we take the same 1-for-10 coverage basis for the ILP, then of $100 invested in the ILP, only $12.50 is paying for $125 of coverage. The remaining $87.50 is invested on your behalf by the insurer.

Of course, you don't get the full $87.50 value, as you are paying the agent commissions on the $100 you invested. When you buy a term policy for the same $125 coverage you only pay commissions on the $12.50 premium. So you pay 8x less in commissions when you buy term and invest the rest. Is it any surprise that insurance agents promote whole life policies, endowment plans and ILPs over "buy term and invest the rest"?

If anyone of you by the way thinks I am trying to get bullets (concrete reasoning) to discuss with my friend, I am.

D.o.g, for those that don't want to handle investment? Something that guarantee at least their principal, while having a probability to make a investment return base on the track record the insurance company has for endowment plans, is it still a bad choice to go endowment? I know perhaps some cynical one will think," guarantee principal? Put in bank" kind of retort, but I just hope that through my questions I bring up relevant pointers for knowledge.

[d.o.g.]

Something that guarantee at least their principal, while having a probability to make a investment return base on the track record the insurance company has for endowment plans, is it still a bad choice to go endowment? I know perhaps some cynical one will think," guarantee principal? Put in bank" kind of retort, but I just hope that through my questions I bring up relevant pointers for knowledge.

For the umpteenth time, when you give money to the insurance company for a whole life or endowment policy it is ALWAYS separated into 2 components. One part pays for the insurance cover. The other part is invested. If the invested part is guaranteed it means the insurer is on the hook for any losses. They are not stupid - if they make a guarantee, the rate of return will be extremely low because most of the money will be used to buy investment grade bonds. Very little will be invested in stocks or property.

If you want this type of crappy guaranteed return you can do the same yourself by buying Singapore government bonds. Horrible returns, but principal guaranteed.

I have long ago given up trying to reason with insurance agents, because their livelihood depends on them not understanding. Because if they understand the logic, they have to agree, which means they have to admit that they are deliberately helping their clients to be worse off financially.

Every agent wants to believe they are helping other people while earning an income for themselves. So, they either pretend not to understand, or refuse to listen. Very similar to the Madoff case (although that was a Ponzi). But the same principles apply - the Madoff feeder funds were being paid huge sums a year (in one case, $280m) to feed money to Madoff. They had millions of reasons not to ask too many questions lest they implicate themselves. Ditto for the superstar insurance salesmen.

People who don't want to learn how to invest will end up poor because they will be steered into bad investments by all sorts of people. Some will mean well, others will not.

So tell your friends who want to buy endowments and whole life policies: Do they understand and accept that with their "outsourcing" attitude they will eventually end up poor?

Maybe they won't believe that their trusted friends/relatives will recommend poor investments to them. Maybe in 20-30 years they will change their mind, but it will be too late. Ask them: DO YOU DARE TO BET ALL YOUR FUTURE SAVINGS THAT EVERYBODY YOU MEET WILL HELP YOU MAKE THE RIGHT DECISION WITH YOUR MONEY? Because that's exactly the wager they are making when they "don't want to handle investment". Yes, they have to spend time and maybe some money to educate themselves. But... if you think education is expensive, try ignorance.

[NTL]

Commissions make the world go round especially sales team. Without these comm, how are they going to feed their family?

Maybe it brings us back to the debate if commission-based structure is a better model compared to fee-based. Sounds like an incentive issue.

Fee-based also collected an "upfront" fee. So what it different from frontload commission? I don't think they going to give free advice, and yet still not having a commission. Will collecting fee make these people less biased? Will they recommend the best or the cheapest? I don't know...

Only going DIY, planning own insurance, planning own investment, do our own comparisons, do our own analysis, only then we can minimize commissions and fees.

---

If anyone of you by the way thinks I am trying to get bullets (concrete reasoning) to discuss with my friend, I am.

D.o.g, for those that don't want to handle investment? Something that guarantee at least their principal, while having a probability to make a investment return base on the track record the insurance company has for endowment plans, is it still a bad choice to go endowment? I know perhaps some cynical one will think," guarantee principal? Put in bank" kind of retort, but I just hope that through my questions I bring up relevant pointers for knowledge.

Why do you want to discuss with your friend about this? You want to break his ricebowl? Causes him doubt, and make him feel bad for recommending sub-par plans?

If you want to look at guarantees, look at Maybank FD. 1.6%pa for 3yrs tenure. I don't think any insurers can beat that guarantee. Furthermore, interest upfront. No investment knowledge needed.

[pianist]

i have quite a few ex-classmates who studied engineering turn insurance after graduation..one became a district manager or something..has a team of agents under him and he owns at least 3 property..and a childcare business milking money from many young couples.

i asked him.."what yr advice for me" in order to be so successful like you. he said - "invest in yourself & trust no one" i was wowed...

[paullow]

hi pianist,
to me thats hard work to earn that big money. besides garmen will makan ur 20% or so in taxes. i hv gone thru that. work damn hard n in end pay taxes damn hard.
but i guess its a way to amass a small fortune to create a big one.
immense wealth can be created by buying the right stocks within a window of opportunity.
no need to bother abt staff mc, order goods, office maintenance. let ur money work for u the passive way
of course, everyone has to pay his dues. nothing comes free n easy. but to me,this is far beyter than managing a business.

[Traumfanger]

I have long ago given up trying to reason with insurance agents, because their livelihood depends on them not understanding. Because if they understand the logic, they have to agree, which means they have to admit that they are deliberately helping their clients to be worse off financially.

Every agent wants to believe they are helping other people while earning an income for themselves. So, they either pretend not to understand, or refuse to listen. Very similar to the Madoff case (although that was a Ponzi). But the same principles apply - the Madoff feeder funds were being paid huge sums a year (in one case, $280m) to feed money to Madoff. They had millions of reasons not to ask too many questions lest they implicate themselves. Ditto for the superstar insurance salesmen.

People who don't want to learn how to invest will end up poor because they will be steered into bad investments by all sorts of people. Some will mean well, others will not.

So tell your friends who want to buy endowments and whole life policies: Do they understand and accept that with their "outsourcing" attitude they will eventually end up poor?

Maybe they won't believe that their trusted friends/relatives will recommend poor investments to them. Maybe in 20-30 years they will change their mind, but it will be too late. Ask them: DO YOU DARE TO BET ALL YOUR FUTURE SAVINGS THAT EVERYBODY YOU MEET WILL HELP YOU MAKE THE RIGHT DECISION WITH YOUR MONEY? Because that's exactly the wager they are making when they "don't want to handle investment". Yes, they have to spend time and maybe some money to educate themselves. But... if you think education is expensive, try ignorance.

Thanks d.o.g.
I know what I am about to say next are tactics used by insurance agent, but I myself find it hard to refute.

On the red portion I highlighted in your appreciated response, my friend was showed data of endowment related policies and the clients are receiving more than the non-guaranteed percentage showed in their policy. So they seems to be making a return on their investment? And when this kind of information is showed it is hard to refute that you are making losses? Yes, it can be said that past performance is not indicative of future performance. But this argument is reflective of self-investment or funds investing.

Are we boiling down to one point? Which is the fees and charges involved are too high for investment conducted through insurance company than a fund manager of your choice?

And through conversing so far, I am starting to think that the guaranteed clause is used too loosely? LIA, MAS will only guarantee the principal when a insurance company fails. Other than that, the investments related policies are subjected to the underlying performance of the funds involved? Am I right?

---

Why do you want to discuss with your friend about this? You want to break his ricebowl? Causes him doubt, and make him feel bad for recommending sub-par plans?

If you want to look at guarantees, look at Maybank FD. 1.6%pa for 3yrs tenure. I don't think any insurers can beat that guarantee. Furthermore, interest upfront. No investment knowledge needed.

He is my best friend. And through discuss I see we are both tied to what we believe. I believe in being self reliant in terms of managing your finance. He believes that the insurance company can help those who are unable to do what I do. He won't recommend investment related to people who knows how to invest. But I want him to see where I am coming from with regards to the "help" the insurance company are offering. But like d.o.g. said it is the non-understanding element of insurance agents to these logics that insurance company continues to sell year after years for products that don't really benefit consumers.

But really some of the pointers they list out are kinda hard to refute.

[safetyfirst]

...
I am not sure if the ILP investment portion can be used to purchase fund which guarantee the principle amount. If such a case exists, i can bet with you that the returns can never be better than a Life/endowment policies due to the higher charges.

Yes, the investment portion can be used to buy any fund that the insurance company carries. Some insurance companies carry bond funds, equity funds, emerging market funds, commodity funds, etc so you can always choose to switch your investment portion amongst these funds.

As for whether the returns is better than life/endowment, i think it is very hard to say. Your life/endowmnet money is simply invested by the insurance company on behalf of you in what they call the participating fund. So the investment returns also depend on market conditions.

~ i worked as an insurace agent for some years in my life.

[paullow]

i recalled yrs ago, i met up with a v senior insurance agent who suggested me to buy a death n total disability of 10x my annual income even if i din want to top up my life plans.
that will ensure payouut of some 5m shd the untoward occur. the premium wld be 2kpm if i din remember wrongly.
my thought then:
1 time payout does not mean much if my family doesn't know wat to do with thr 5m. they might still need to engage a financial advisor.
also, this 2kpm premium is gone with thr wind if nothing happens.
2kpm or 24kpa, i could havr better use for it.

till today, my life insurance is a mere 80 or 100k. i dun know if this sounds like a joke.

[pianist]

i recalled yrs ago, i met up with a v senior insurance agent who suggested me to buy a death n total disability of 10x my annual income even if i din want to top up my life plans.
that will ensure payouut of some 5m shd the untoward occur. the premium wld be 2kpm if i din remember wrongly.
my thought then:
1 time payout does not mean much if my family doesn't know wat to do with thr 5m. they might still need to engage a financial advisor.
also, this 2kpm premium is gone with thr wind if nothing happens.
2kpm or 24kpa, i could havr better use for it.

till today, my life insurance is a mere 80 or 100k. i dun know if this sounds like a joke.

sifu, u r not alone. my death coverage also less than 100k todate. in fact, i am thinking of discontinuing these nonsense policies.

[thefarside]

On the red portion I highlighted in your appreciated response, my friend was showed data of endowment related policies and the clients are receiving more than the non-guaranteed percentage showed in their policy. So they seems to be making a return on their investment? And when this kind of information is showed it is hard to refute that you are making losses? Yes, it can be said that past performance is not indicative of future performance. But this argument is reflective of self-investment or funds investing.

Your friend is shifting the goal posts in his interaction with you. Instead of talking about how your premiums are utilised by the company so that you can judge if it is efficient or they are just filling their pockets with your premiums, they talk about how some clients have made money based on the very low return benchmarks they have set for their policies.

He should talk about 1) how much goes to mortality costs (i.e. the insurance pool that pays out the death benefits) 2) administrative charges by the company 3) agent charges/commissions and 4) allocation to investments and 5) attrition costs related to those investments.

Instead of providing these figures they confuse the consumers with 1) effect of deductions 2) guaranteed and 3) non-guaranteed returns, based on some random 5.5% p.a. compounded rates which is basically meaningless and completely non-transparent.

My wife once managed to get the mortality tables for her ILP once from one of the major insurance companies - think they sent her by mistake after she requested for it but after we got that we canned the policy immediately, as well as all our other life plans sans one last one with another company that I have been paying for more than 5 years and looks ok on on expected cash value at the end of the 2 decades.

But one should not BTID blindly. Not everyone are above average drivers, as one poster here had put it succinctly. Mathematically, only half of the population can be above average drivers and of that group, maybe a small group at the top will drive well enough to make a difference. For the rest... I suppose its good luck.