Tan Kin Lian's Blog: Make a balanced decision

Wednesday, September 16, 2009

Make a balanced decision

A few insurance agents have criticised me for my views about over-spending on buying of critical illness and private shield. They argued that, even though the risk is small, it is necessary to protect against the risk.

It is important for consumers to make a balanced decision. Each person has only a limited amount of savings. If you spend too much of your savings on insuring against risks with a low probability of happening, you will not have sufficient savings for other risks.

The biggest risk is insufficient money at retirement. Most people will survive to retirement without a critical illness or big hospital bill. If you over-spend your savings on insurance, you will not have enough savings for your retirement.

When you buy insurance, make sure that you pay the right amount of premium. Do not pay too much. Do not buy insurance that is not really necessary. Choose an adviser who takes care of your interest, rather than one that wants you to spend more (and you know why).

You can buy term insurance (including cover for critical illness) up to age 60 (or earlier) to give a large cover for a modest premium. You can scale down the cover at the older ages, to keep the premium low (e.g. decreasing term insurance or family income benefit). Read this FAQ for the benchmark premium.

Most people need insurance when they are young but they only need to cover for a period of say 25 years. After 25 years, they will have sufficient savings to protect them against loss of income due to illness or unemployment. But they need to put their savings in a low cost fund, so that it can grow and give a good rate of return. (Most structured or life insurance savings products take away too much charges and give a poor return).

There is a big argument about the merits of Medishield and Private Shield. There is no doubt that Private Shield covers more than Medishield, but consumers should ask the question - is the justified to incur a higher cost? The lifetime cost for Private Shield Plan A is 2.5 times of Medishield. Why pay 2.5 times of the cost when for most cases, Medishield will be sufficient to cover all the cost (excluding the co-payments). In fact, Private Shield requires you to bigger co-payment when you are hospitalised.

I want you, as a consumer, to be aware about the choice to be on Medishield. I have presented my reasons. Your insurance agent will present the argument to be on Private Shield. You have to make the final decision.

If you are happy with Private Shield, it is all right. If you decide to convert back to Medishield, you can get cancel your Private Shield and ask the insurance company to put you back on Medishield. I did that.

To recap: You have certain amount of savings to take care of your future financial security. You have to use this savings wisely. You can cover some risks through insurance, but you have to pay the right premium. Do not over-spend on insurance, and leave insufficient money for your retirement needs (as this represent the biggest risk that you have to face).

Tan Kin Lian

23 comments:

Anonymous said...: REX comments as follows:

I cannot understand your statement:
"When you buy insurance, make sure that you pay the right amount of premium. Do not pay too much. Do not buy insurance that is not really necessary. Choose an adviser who takes care of your interest, rather than one that wants you to spend more (and you know why)."

How do you know what insurance is "really necessary". Insurance is not an exact science. It is a bit of gamble. Who knows what is REALLY necessary till the last day one breathes.

Also, how can you choose an advisor who TAKES CARE OF YOUR INTEREST? Why would a complete stranger take care of your interest, if not for the fact he makes money from you? It sounds like a naive question.
Also, your post assumes that spending more will always mean "not taking care of your interest". This blanket statement is erroneous. For example, i am looking at a Term insurance that has cheap premiums of $10 a month, covered for $5000. The insurance adviser says, hey pal, $5,000 cover-- it can't even pay for your funeral expenses and medical costs.. please cosnider premiums of $50 pm to get cover of $100,000. In such a case, paying more is reasonable, because it is value for money. Of course, i agree with you, there are also cases where paying more is to your disadvantage and will only help the agent's commissions. But the blanket statement of paying more is bad..is too simplistic... it is not necessarily true, it depends on each case.

I know MR tan that the point of your post isn't as construed of as above. I know the intention of the post and concur with it. Nevertheless, i have a problem interpreting your english, the way the post is written, i feel that it can lead to wrong conclusions and can cause dire consequences to the unwary.
REX; September 16, 2009 8:22 AM
Tan Kin Lian said...: Hi Rex,

The consumer has the following choice:
a) Educate himself. Join FISCA. Attend the talks by FISCA.
b) Find an adviser who works for a time-based fee. FISCA will accredit these advisers at a later date.

To answer what is necessary, consumers must ask the common sense questions. Read my "financial planning book" for these questions. They are:
a) What is being covered
b) What is the chance of making a claim
c) How much am I paying?
d) What are the charges imposed on the consumer for this product?

If you do not get a satisfactory answer, you should avoid this product.; September 16, 2009 8:42 AM
Zhummmeng said...: You insure a risk, let us say $600K for your family income if you should die.Can you afford the premium for a wholelife, a term , decreasing term? Obviously decreasing term is most affordable. WL? it costs a bomb. But insurance agents have no qualm peddling the WL to the customers but at reduced coverage of $60K becuase of the high commission WL carries.This is short changing the client.The WL is expensive and yet unable to address the client's need of $600K. Why the agent recommends WL because the commission he gets from a $60K WL is still far more than the commission from a term of $600K and that is NOT putting the client's interest first.The premium from buying a $60K WL can buy a decreasing term of more than $600K. And why the agent is not recommending that? The answer is obvious.... his despicable greed , his lack of conscience..

How to choose an adviser,, a planner and NOT a salesman and product peddler.It is not easy..This is because MAS allows all kind of scam artistes into the industry.
The best approach is seek a financial planning body or association like the financial planning of singapore(FPAS) for an accredited qualified financial planner. You will sure get a planner with the right professional qualification ,expereince, skill and knowledge.The foremost financial qualifications recognised globally are CFP and CFA. However , this does not guarantee that you have an honest planner. To get around this , interveiew the planners and ask for references of his work and listen to what others say about him or her. Like lawyers and doctors the association is a self regulating body to discipline their errant practitioners.This might be the safe guard for consumers if you use a advsier or a planner with designation like CFP or CFA.These bodies have their own disciplinary committees to deal with issues of ethical, scam and consumers' complaint , like the Law Society and Medical Assocaition or the CPA institute.
This is what consumers should look for , honesty and competence and NOT salesmen like many insurance agents out there.
The tell tale sign of a product peddler is that their name card has many dubious awards like mdrt, cot and TOT or any other logos of sale awards. These are the salesmen who peddled and sold many wholelife or endowment products with high commission. The awards are commission based, ie . the awards depend on how much commission the agents squeezed from their trusting clients.To be fair to these product peddlers they are real good glib tongue salesmen and these awards are in recognition of their skills to squeeze their clients and this makes them good salesmen at best and certainly not financial planner.If you have an agent with such awards I bet that you have lots of wholelife and endowment policies.This is waht Mr. Tan warns that these products won't help you to retire. They are expensive and inefficient. Symptoms of people with these products are they are under insured and money no enough for retirement, very typical profile of Singaporeans today.
Verdict is don't trust insurance agents who peddle useless product like WL and endwoment that squeeze your resources. Look for financial planner with financial tertiary qualifications like CFP and CFA for help with your finances.They provide responsible and competent financial planning advice and put your interest first.They charge a fee and NOT motivated by commission and you will get more than waht you pay.If they are fee/commission based fee will be waived after the completion so that you will get more than the salesmen insurance agents who peddle the products to you.The safe guard for you is the same as offered to consumers who use the services of lawyers and doctors.They are censure, suspension and revocation of license if they are found to have committed misconduct like the FAA section 27 or failed to meet the fit and proper requirement.There is still no qaurantee but this reduces your risk of having product peddling cowboy and cowgirl insurance agents who use the 5Cs to dump par products on you.; September 16, 2009 10:03 AM
Anonymous said...: hello REX comments as follows.

Strangely, I find it a bit of oxymoron concept, "to select a good financial consultant knowledgeable and able to plan for your needs". If one has the ability to select such a consultant, interview him well, grill him on this and on that, then, one is probably already quite financially savvy to make one's life decisions independently.
Conversely, if one is not very much able to make good financial decisions, one is likely not to be able to tell the sheep from the wolf among the financial consultants basket from the onset.
I'm not opposed to all the ideas above, just curious how it can be implemented from practical point of view, and.. as pointed out.. even within a good organisation there are wolves.

REX; September 16, 2009 11:11 AM
Anonymous said...: oops sorry Mr Tan Kin Lian, I think I posted somewhere a duplicate post please feel free to not post it about my point about upgrading and paying the difference from a Medishield to a private shield plan. Thanks.; September 16, 2009 11:18 AM
Anonymous said...: Rex - there is already a lot of information and advice on Mr Tan's blog and in Dr "Money" Larry Haverkamp's weekly column in The New Paper on how to distinguish good financial advisers from bad ones. Although there aren't many good financial advisers, it isn't so difficult as a lot of it is common sense like the numbers given by Zhummmeng above. Most advisers and unit trusts cannot even beat the benchmarks and ETFs. Buy Term, Invest the Rest.; September 16, 2009 12:14 PM
Anonymous said...: How to trust FA when they came out of Lehman Brothers MB training in Phillips Securities and advises client that :-

a) Low risk and safe as fixed deposit
b) 6 companies' bonds.
c) Nothing was mentioned that LB and Minibond Pte Ltd are also credit risk.
d) Did not know that 9/150 underlyning securites default posed a even higher risk.
e) Did not know that it is not a bond but a insurance scheme to trick investors.

The mistake I made was to trust them thinking they put my interest at heart. So are we going back to square one of choosing and selecting a good FA? Those FA I chosen are good friends but they are just not competent. So they pass on to Phillip Securities DCM to advise according to MAS report. What does the DCM do? Nothing much as they are also attended the same training.; September 16, 2009 12:30 PM
Anonymous said...: REX,
worry that consumers not able to identify a good and honest financial planner from the salesmen and product pushing insurance agent Zhummmeng has already suggested that you go to financial planning body to ask for one. The website is http://www.fpas.org.sg
Asking a few simple questions doesn't make you savvy . If the advisers approach your needs/illness like the doctor that MIGHT be a correct one as opposed to salesman who will peddle the product upfront.
In future FISCA will be able to help consumers to engage good advsiers and planners through education; September 16, 2009 12:53 PM
Anonymous said...: REX,
to ensure that you don't get a fly by night insurance agent who only peddles products with high commission MAS should legislate and make it compulsory that every agent by whatever name they are disguised conduct examinations like the doctor before the prescription of the solution.
Also to show how qualified and honest they are, they should charge fee only and NO more commission from the products.MAS must remove the commission, the mother of all evils.
To be a respectable adviser one must be responsible for one's recommendation and stand by it and be accountable for it.
You and I cannot do it . Only MAS can.; September 16, 2009 2:24 PM
Anonymous said...: - Have a job and insured under Workman Compensation by employer
- Had Medishild
- Had CPF Dependant Insurance
- CPF Life
- Be health conscious
- Acquire knowledge at a community library
- Associate with good friend who is NOT interested in your saving !; September 16, 2009 4:48 PM
Anonymous said...: It boils down to choices.

If a person choose to stay in higher class ward, buy a private plan. If a person choose to stay in lower class, stick to Medishield.

75% of beds in our hospitals are B2+, B2 and C.

What is the difference between 25% of beds that A and B1 and those of B2+, B2 and C?

No difference! The beds are same.

Only patients in B2+, B2 and C got bigger toilets (along the corrider), get to enjoy fresh air (instead of recycled air), and can relax their eyes and ears instead of suffering from the light and noise pollution coming out from environmentally unfriendly small LCD panel, and they have easy access to any doctor on duty instead of having to go through the trouble of choosing their own doctors. Better still, for B2+, B2 and C, you will never be alone and suffer in silence because you always have someone to talk to (and vice versa)!

It is simple. People just need to make their own choices.; September 16, 2009 8:14 PM
David Wong said...: I has a part to play in those previous comments about private shield plan. now please allow me to comment about the part on buy term invest the rest.

seriously people who only believe in buy term invest the rest really don't know financial planning. ILP is there for a reason. The main aim is CHEAPER, FAIRER and more COST EFFECTIVE Insurance even compared to TERM, and NOT because of RETURNS . Surprised? Cos of the dynamic mortality charge as compared to WP, Endow and Term.

2 financial planners in US has already got sued for advocating this "buy term invest the rest" quote. Some of them just care about their hefty trailer fees and even willing to compromise needed insurance coverage for their clients.

I agree traditional WP and especially Endowment are useless. there is also a reason why "traditional" plans like WL and Endowment are almost vanished in US and Aust and citizens are educated about ILP.

In these countries esp US, they are educated from young about financial planning and its sad that people here not as educated are acting "know-all" and are sprouting this kind of of rubbish all around.

i agree death coverage does not need to cover whole of life but how can one say that you definately don't need to cover critical illness for whole of life??

medical technology is advancing so fast and medical inflation is happening at 6 percent a year!

things that insurance will never cover in black and white in definate terms are medication for the 3 to 5 years of your treatment, private nursing care, loss of income temporaily and permanently, dialysis treatments, complications like disabilty as a result etc...

will you be sure enough if critical illness strikes even in your later years, you don't need the coverage to fork out for all these expenses? esp when medical inflation is so high?

take a look at this. i wont even use AVIVA whole life 200k CI term as a fair comparison as it is more expensive ($230 monthly). Now lets look at this X company for comparison for a person 30 years old,

Term that covers till 75 years old - cover 200k for ACCELERATED Critical Illness, Death & TPD - $179 montly. TOTAL NET COVERAGE 200K.

ILP coverage whole life- cover 100k Death & TPD PLUS ADDITIONAL 200k for Critical Illness - $205 monthly. TOTAL NET COVERAGE 300K.
(**real educated people will know even in this case, if the client just pay till 55 to max 60 years old and the coverage will continue till he/she dies)

therefore difference only a mere $26 extra per month but have to pay till 75??

end of the day at age 75

Term - ZERO VALUE
ILP - 200K in CASH VALUE (projected 8% PA - benchment for world wide equities for the past 30 years)

As long you know your simple maths you will know what i am talking about. Stop bashing your roots just for political reasons. Be grateful to it.

For Passion,
David; September 17, 2009 5:47 AM
David Wong said...: Anyway i need to applaud Mr Tan for embracing diversity by accepting my differing comments. I respect you for it.; September 17, 2009 6:00 AM
Tan Kin Lian said...: David Wong quoted a bad example of a term assurance payable to age 75. It is almost like a whole life assurnace, but is worse. Of course, the premium is high.

The proper term assurance to compare is a decreasing term assurance for 25 years, as show in my FAQ:
http://www.tankinlian.com/faq/benchmark.html

The premium is very low, and it provides the right coverage.; September 17, 2009 7:31 AM
Tan Kin Lian said...: To David Wong (6:00 AM)

I do not need the differing comments posted by insurance agents and financial planners. Most of them use "diversity" to put repeat their sales pitch (usually not balanced) to confuse the consumers.

This blog is for consumers to read my views. You have a lot of opportunity to present your "diverse views" to your client when you meet them. They can decide for themselves.

You can also set up a blog and invite people to read your views there.; September 17, 2009 7:40 AM
Anonymous said...: David Wong,

I fail to see your logic of promoting ILP. Isn't it far better to buy term and invest in say unit trusts separately??; September 17, 2009 3:26 PM
Anonymous said...: I think people like David Wong are perpetuating the myth that investing is complicated and term insurance is expensive. He has specially selected a very expensive example of term insurance so that customers will instead stupidly buy ILP and give away their money to insurance agents. There are much much cheaper term insurance plans available than the stupid example he used and it is very simple and easy to invest the rest of your money in a low cost instrument like STI ETF. Beware of people like David Wong who use language like "Stop bashing your roots just for political reasons." He is not arguing based on reason but based on emotion. What roots are you talking about? My term insurance from NTUC Income from Mr Tan's time as CEO only costs a few hundred a year. What political reasons are you talking about? Are you arguing based on speculation about Mr Tan's motive or based on the substance of what Mr Tan is saying? I think people like David Wong will do all kinds of things to maximise profit and such people make me sick.; September 17, 2009 3:57 PM
Vincent Sear said...: Single premium ILP or unit trust investments serve a different purpose from term or whole life regular premium insurance. Firstly, with the constraint of ILP structure, regular premium ILP shouldn't be in place in the first place. It defies ecomonic logics which the clients have to pay for.

Traditional whole life is based on X age expectancy, usually 85. Then we have participating whole life, meaning bonuses to be added to policy values, but also meaning more premiums and therefore more commissions for the agents selling them. No problem, as long as everybody's getting a fair deal.

Then came ILP. It should have been just a simple unit trust collective investment. There's no way an insurance actuary could fix up a whole life policy based on ILP because nobody could be sure that the volatility could sustain a level term premium. So how? Overcharge first and settle later. Worse come to worse, policy lapse, that's all.; September 17, 2009 9:31 PM
Anonymous said...: Regular ILPs are known as variable whole life. It covers wholelife. It is a better plan than traditional whole life in many ways.It can serve as flexible multi purpose plan.
Both traditional WL and regular ILP are rip off in term of cost .
Volatility is not as you think. The truth is traditional WL is more "volatile". You don't know because it is NOT transparent and the insurer won't tell you.
Regular ILPs are less risky if you use a moderate risk portfolio with potential higher return. The reason that ILPs have a "bomb" at old age is because policyholders overstretched the insurance coverage and forgot to adjust or lower the coverage.It is a 'good' plan than traditional WL especailly when you are young.
I won't recommend it because like WL they are rip off. The best is still BTITR and you won't have any of the problems associated with regular ILPs and WL.; September 17, 2009 10:50 PM
Anonymous said...: Mr Tan i think ur efforts are really commendable and should be respected. i understand your point but however i think David W has intention to convey the msg critical illness sld be covered whole of life and i can see some good reasoning here to be fair as my mom has cancer before and i know the expenses involved.. i don't see he has any intention to convey investment is complicated. but his sentence of "bashing roots" is totally out of point. he should have given you more respect. if he was not so emotional, he may be more convincing tho.

here is my story to share..

i initially have a term plan after my mom's case and subsequently i lost my job. the amt is $135 per month and covers me till 62 or 65 years old (dats the max term i can find from my fren so i dunno where David can find a 75 years and a whole life term. i might be interested tho if true). coverage is 200k critical illness. i wanted 200k cos the cost my mom suffered when she is not hospitalised is about 150k plus for medication and stuff and she stayed at B1 ward. our family is always worried that the cancer may come back.

however i gave it up after when i realise i have to pay back the 8 months of premiums i owed and have to go for a medical checkup using my own wallet.

i later got an ILP from my friend just based on pure trust which later i have no regrets. there is 1 thing i like abt it.

there is this unlimited reinstatement options from my ILP. i don't know whether other companies have it but it helped me alot. it means if i stopped for a couple of months, i just need to pay 1 month and the plan resume back as per normal. and surprisingly, the coverage stays when i stop paying as some "holiday" thingy and there is no penalty at all. i just need to pay the 1 month, sign a form even without declaring my health and i did it twice successfully so far.

well juz speaking out my 2 cents worth tho from my personal and heartfelt experience.

anyway keep up the good work on the website! the views and knowledge here are definately interesting and enriching =); September 18, 2009 4:01 AM
Anonymous said...: hey previous Anonymous how much are you paying per month and how much is ur coverage for your ILP? is ur 150k expenses for ur mom includes hospitalisation bills or not? so are they subsidised?? Mr Tan and fellow Singaporeans hope you can help me. i am confused.

can anybody hopefully including Mr Tan explain what is reinstatement option? also what is the dynamic mortality charge in ILP? is it really cheaper and more cost effective for ILP in the long term based on coverage? my adviser did not tell me at all about this 2 terms if they really exist. and lastly what is the "holiday" thingy you are talking about??? can go ask ur adviser? he just explained briefly and passed me all the quotes after a torturous financial planning session.

i see the importance of getting a critical illness plan but now pondering should i consider covering till only about 60 or whole life. I am a sole bread winner and have 3 kids and thus both insurance coverage and cost effectiveness means alot to me.

i have a few term different company quotes and a single ILP quote from a friend in IFA and as it seems, the longer duration i want to cover, the more expensive the premiums are and i am really confused. for the cheapest term plans, if i want to cover myself till 61, i have to pay $118 monthly for 200k coverage. it is not exactly cheap. if till i am 71 and 81 respectively, it is $161 and $225 monthly respectively! any advice which 1 sld i get? or sld i just get an ILP at $220 monthly for a 200k critical illness coverage plus 120k death? i am seriously confused and i need help! hopefully Mr Tan can give some insight here.

oh btw David why are you not responding? hopefully you are not banned for being to differing or something? LOL.. it will also be interesting to hear your views. i do see sense in your argument though but Mr Tan's one also make sense in his own rights.

any help or clarification is much needed! thanks!!

regards,
Mr Confused; September 18, 2009 6:21 AM
gerimegaly said...: The dynamic mortality charge they are talking about, refers to the cost of the "insurance coverage" in your Regular Premium ILP. It is an "ever-increasing" factor, when calculating the cost of insuring $200K (Death and CI), for as long as the policy is intact.

Just check your policy document, where there are tables showing the pricing/costs for Death or Critical Illness (CI) coverage at different ages.

Say when you are at age 65, look at the figures shown at Age 65 on the table and multiply it by the amount you are insured and that will be how much it costs, for your insurance coverage(mortality charge) for just that particular year. Both tables for Death & CI coverage usually independent.

Be prepared for premiums amounting to a couple of thousand dollars a year, for $200K Death & CI; September 18, 2009 8:50 AM
Anonymous said...: To Mr Tan based on the following paragraph:
[To recap: You have certain amount of savings to take care of your future financial security. You have to use this savings wisely. You can cover some risks through insurance, but you have to pay the right premium. Do not over-spend on insurance, and leave insufficient money for your retirement needs (as this represent the biggest risk that you have to face).]

It seemed to over-insurance will leave insufficient money for one's retirement needs. One knows that. However, my agent tell me off about such statement (Read the last sentence) is not true when one cannot use Medisave for any other purpose other than medical (Hence the name). He (My agent) say things about this statement about Private Shield is needed and encouraged by garment (Obviously garment cant make companies go out of business and loss company tax which ends up being socialist / communist) and a $20 of difference or rather savings would make much difference (No $ to retire)? Oh my god! I am totally confused.

I declare: I am a young citizen who is graduating in a year time, not an insurance agent!!!; November 05, 2009 2:06 PM

Wednesday, September 16, 2009

Make a balanced decision

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