Singapore’s 1st Life Insurance Comparison Web Portal
The Case of Term vs Whole Life Insurance: A Comprehensive Consumer Guide
Contents Page
3
Credits
Page
4
Prologue
Page
13
Chapter 1
Insurance Philosophy
Page
25
Chapter 2
How Long Do We Need Insurance Converage For?
Page
33
Chapter 3
How Much Insurance Do We Need?
Page
37
Chapter 4
Which Type Type Of Insurance Is Suitable To To Cover Our Needs?
Page
46
Chapter 5
Why Are More Whole Life Plans Sold Rather than Term Term Plans?
Page
54
Chapter 6
The Story of Providend and The birth of DIYInsurance
Page
59 Page
Epilogue
64 Appendix
Contents Page
3
Credits
Page
4
Prologue
Page
13
Chapter 1
Insurance Philosophy
Page
25
Chapter 2
How Long Do We Need Insurance Converage For?
Page
33
Chapter 3
How Much Insurance Do We Need?
Page
37
Chapter 4
Which Type Type Of Insurance Is Suitable To To Cover Our Needs?
Page
46
Chapter 5
Why Are More Whole Life Plans Sold Rather than Term Term Plans?
Page
54
Chapter 6
The Story of Providend and The birth of DIYInsurance
Page
59 Page
Epilogue
64 Appendix
Credits Writing a book can never be an individual effort, especially for a book of such nature. As such, I am grateful to the following people for helping and supporting me, in the completion of this endeavour in just 2 weeks.
1. Eddy Cheong, Executive Director, Director, Providend Ltd and Head of DIYInsurance 2. Catherine Lum - Financial Planning Specialist, Providend Ltd 3. Sean Cheng - Investment Analyst, Providend Ltd 4. Shawn Lee - Brand Executive, Providend Ltd 5. Alexis Burgos - Brand Executive, Providend Ltd 6. Germaine Lay - Web Developer, Providend Ltd 7. Cynthia Khor - My wife of 21 years, whom I ignored for 2 weeks (in the evenings and weekends) when when I had to write this book.
And to all the staff at DIYInsurance - Thank you for serving our clients and by always putting their interest rst. And to all our clients at DIYInsurance -Thank you for believing in us and making our mission of making DIYInsurance the safest place to buy insurance possible.
Christopher Tan CEO of Providend Providend and and Founder of DIYInsurance
3 Credits
Prologue
4 Prologue
I
t all started one evening on 16 June 2016, with a Facebook post on our DIYInsurance page by Marq Siew. He read an article (Term vs Whole Life) that we posted and disagreed with what we have said.
The following is the actual Facebook exchanges between us that spanned a few days. A few other nancial adviser/insurance advisers subsequently joined in, sharing similar sentiments.
THE FACEBOOK EXCHANGE - UNDERSTANDING THE CONTEXT Marq Siew
Why is DIYinsurance product-oriented instead of customer-oriented? Why not focus on how to get the most appropriate protection instrument-type for the particular person? Why is there a need to have an obsession with arguing about which instrument is better than the other? Is DIYinsurance advocating a one-size-ts-all approach? Or a one-type-ts-all approach? If there is a minimal understanding of insurance, one would know that all types of policies are created and designed with a different reason and purpose: to be suitable for different people. If there is a basic understanding of how market forces work, DIYinsurance should know that if there is really only 1 type of protection instrument that makes sense, how long will it take for the public to nd out? Why is there not a massive landslide of market share to only that instrument even after 50 years? Was term insurance invented 5 years ago? The analogy that was given in this video is not similar but close to telling us why we should always rent a home (no cash value) and never buy a home (with cash value). There is no best nancial instrument. Only the Most Suitable. Just like your spouse. (If not everyone will only insist on marrying Fan Bingbing.)
5 Prologue
DIYInsurance.com.sg
Dear Marq Siew, thank you for watching this space and your comment. You are indeed right to say that we should not be product-oriented but customer-oriented. It is precisely because of this that we have since 2003, been educating the consumers on why using Term insurances might be a better option. It is well known in the industry that selling Whole Life plans pay better. We would be selfserving if we have advocated it but instead, we chose to advocate a lower cost but better suited product to consumers. This is our way of putting our clients’ interest, always rst.after 50 years? Was term insurance invented 5 years ago? We are passionate about doing this, not because we believe in a one-size t all solution. We do so because if you understand the use of insurance in one's nancial plan, you will see that this is a fundamental issue: Insurance is for protection and not investment for returns. And for the large majority, and we emphasise large majority , this need for replacement of income due to death is a temporary need. There will come a time when there is no longer a need because we are no longer earning an income. Also, using Term insurance is the only way to be fully covered. For the minority that may need Whole Life, and really there aren't many in our almost 2 decades of experience, when they pass through Diyinsurance.com.sg, we will certainly advise them accordingly. You are also right to point out that after 50 years, most people in Singapore continues to buy Whole Life Plans. This is because in the earlier days, we do not have many well-designed Term Insurances available and also the lack of nancial literacy education. This is why we are doing this since 2003. We are gratied that more and more consumers and insurance agents are understanding this and buying Term Insurances. We have also known of many insurance advisers selling Term despite earning them a lower commission. This tis indeed laudable. You may also be encouraged to know that in more developed nancial markets such as Australia, US and UK, the use of Whole Life Plans are almost non-existent. We are far way from being there but we hope Diyinsurance.com.sg will be able to play a small part to help us reach there one day. Unfortunately, we feel that the use of renting versus buying a house is not an apt analogy here to compare Term to Whole Life Plans. Due to the lack of space, we will leave that conversation to another day. But Marq Siew, thank you for your interest and comment. We appreciate it because such friendly debate provides consumers with more understanding. I am sure we all just want to do the right thing for the consumers.
6 Prologue
On a separate post Marq Siew
A comparison within 1 instrument type is ok. Term insurance is a comparable instrument anyway. DIYinsurance, do NOT try and blast the industry with nonsense and try to tell us which instrument is the most suitable without understanding each individual person. Read my post to see why I said this. Spruyt Darren Seems like they deleted your other comment... Marq Siew
It's still there bro. Under "Term VS Whole Life insurance" posted as of 8th June. Get ready to see more information you have never seen, if DIYinsurance dares to show the rates, which I doubt they will. DIYInsurance.com.sg
Dear Spruyt Darren, we normally do not delete comments unless there are expletives involved which in this case, Marq Siew was very pleasant in his explanation earlier. Thank you for your comment in any case. DIYInsurance.com.sg
Dear Marq Siew, while we make reasonable comparison within and across each type of insurance, we would like to assure that every client that has come through Diyinsurance.com.sg has gone through customised advice as required by regulators. Since 2003, we can understand why some industry advisers are upset with us advocating Term Insurances But we are also gratied that this is changing. Financial advisers in Singapore and other parts of the world who really understand the use of insurance are beginning to see the better alternative to whole life plans. This also explains why more and more insurers are coming out with really good and competitive term plans. Once again, thank you for your interest in this space and your comment. Have a good weekend, Marq Siew.
7 Prologue
DIYInsurance.com.sg
Dear Marq Siew, thank you for your comment. Would you elaborate on the rates you would like Diyinsurance.com.sg to show? Thank you one again for watching this space. Marq Siew
Thank you DIYinsurance. I am glad we share the same philosophy of providing tailored and customized solutions for each unique individual. I would like to nally and immediately, put a Full-Stop to a well heard rumor: that it is well known in the industry that recommending Term Policies gives nancial planners Lower commissions, and thus nancial planners/consultants/advisers don't recommend them. This is supposed to be the distinguishing difference for DIYinsurance, because DIYinsurance champions Term insurance. For transparency and comparison, let's reveal this once and for all since DIYinsurance is adamant that Term polices denitely give Lower commision rates.
I hereby request for an Evidence of a commision rate table of Term and Whole Life products: (I) to prove that the commision rates from pure Term instruments are lower, and for apple-to-apple comparisons, use both products of same coverage tenure till age of 99 or 100. (II) the commission % you show in (I) should be the exact % which Insurance Manufacturers (such as Tokiomarine, AXA, AVIVA) give DIYinsurance via the Distribution Agreements your IFA have signed with them. (III) I would like to ensure for fairness sake of the whole Singapore market, that as an IFA, although DIYinsurance likely may not have the right to sell for certain companies, please also provide in the same table of point (I), PRU, AIA and GE commission rates for Term and Whole Life policies as well. Same method, for apple-to-apple comparisons, use both products of same coverage duration till age of 99 or 100. Let's allow the whole world to see which Insurance company/manufacturer is so bold as to give lower Commissions for recommending Term coverage/policies.
8 Prologue
The blame should go to the particular insurance company, instead of going after the anonymous nancial consultants whom DIYinsurance often speak about. Marq Siew
By the way, regulators have indicated before that they do not wish to see product-type pushing (Term policies are a product-type), by expressing that Incentives should not be given for any particular product-type. One might argue that Term cover need not be until the age of 99 or 100, but since it is impossible to structure a Whole Life instrument into a shorter number of years, but there is the existence of Term policies which can cover until the age of 99 and 100, let's use that as an apple-to-apple comparison. If anyone wants to insist that Every human being requires protection cover only until an exact certain age, that is a broadstroke technique, which shows zero understanding of providing customized tailoring for each unique individual. One might also say that it is sensitive to publish commision rates, or that the insurance companies/ manufacturers do not allow you to do so.
If that it the case, I would request DIYinsurance to stop publishing articles which insinuates that Singapore nancial planners/consultants/advisers get Lower commission rates for recommending Term policies, and make a public apology, because that is an accusation by DIYinsurance, which has not been backed by DIYinsurance's disclosure of factual gures to the public. DIYInsurance.com.sg
Thank you Marq Siew for your request. Since this would be a very long post. We will do a write up and post it accordingly. Once again. Have a blessed weekend. Follow up posts Marq Siew
Yes Kel Goh. I'm waiting for the evidence to be provided, to see if the Comm rate is the same for Term and Whole 9 Prologue
Life policies. If the Comm rate happens to be the same, then whether the nominal commission is lower, will actually depend on the size of the Term policy, and the blame should not be on the instrument type. Nobody can guarantee that a larger Term policy with no cash value will denitely have lower Commissions, compared to a smaller instrument with cash value. Why demonize the cash value of a policy when the actual issue is about customization and tailoring? A needs-based approach is based on a full understanding of the unique individual, not based on the glorication /worship of a particular product-type. Is it even correct to assume that all Singaporeans do Not require coverage after exactly 65 years old? That is what I read from another DIYinsurance article, "Singapore's Term Life Insurance Comparison Table (June 2016)". On what basis can anyone insinuate/suggest that when a nancial adviser did not recommend a Term policy, it is denitely because of lower Commissions and not because of a need-based and priority-based recommendation?
It is as audacious as suggesting that every adviser who recommends a CPF Investment instrument, is preparing to commit Churning. Advocating the appropriate Term cover for suitable people is a noble act, but not by insinuating that all other recommendations are wrong.
END OF THE FACEBOOK EXCHANGE Just in case you do not have the time to read the detail, this is in summary Marq’s points of contention: 1. That in advocating Term insurance, we are not being customer-oriented but product-oriented.
2. That we are obsessed with arguing which instrument is better. He feels that all products are created to meet a certain need. If DIYInsurance advocates the use of Term insurance against Whole Life plans, we are advocating a one-size ts all approach. We should instead customise each plan to customers’ needs. 10 Prologue
3. That regulators have indicated before that they do not wish to see product-type pushing (Term policies are a product-type), by expressing that incentives should not be given for any particular product-type. As such, by advocating Term insurance, What DIYInsurance is doing is akin to product pushing. 4. That If Term insurance is so good, like what DIYInsurance is saying, there should be a massive landslide of market share to Term plans. But this is currently not the case. Marq is alluding that good products will lead to huge market share or simply put, a huge market share means that the product must be good. 5. That Providend/DIYInsurance is saying that Term insurance commission rates are lower than Whole Life commission rate. And as such, we should publish a table on commission rates to the public. 6. That DIYInsurance is insinuating Singapore nancial planners/consultants/advisers because we allude to them getting lower commission rates for recommending Term policies and so most prefer to recommend Whole Life plans. 7. That DIYInsurance should make a public apology for point 6. 8. That we assumed that all Singaporeans do not require coverage after exactly aged 65 years old. We want to thank Marq (and many other insurance & nancial advisers) for following us at DIYInsurance and sharing their thoughts on how they view insurance as advisers. Through these discussions, we realise that after more than a decade of writing about insurance, there are still many misconceptions that need to be claried. So, instead of answering Marq’s questions/pointers one by one, what we will do is to rst provide a thorough understanding on this subject of insurance. By doing so, we achieve the following objectives: a. Provide a context, and a basis for answering Marq’s questions/pointers b. Give a better understanding to other advisers on our professional views about insurance c. Consumers through this book will also be able to discuss more systematically and clearly with their advisers, before making their insurance decisions going forward. But since insurance is a very wide topic, to cover every area and type of insurance in one book will not only be too much but also make this book unreadable. And since this book is really about the Term vs Whole Life debate we will limit our discussion to: 1. Insurance that replaces your income loss due to death, total and permanent disability and dread disease (critical illness)
11 Prologue
2. Insurance that provides money for alternative medicine and care
At DIYInsurance, we believe in empowering our clients to make wise nancial decisions. We are thankful that we have a chance to do this via this platform. In many ways, all of us have Mr Marq Siew to thank for the birth of this book. Without him sharing his views on insurance, the idea of this book would never have materialised. Note: In the course of writing this book, more Facebook posts from Mr. Siew and others (many who are advisers) ooded in. We have shared these post in appendix 6 of this book.
12 Prologue
Chapter 1 Insurance Philosophy
13 Chapter 1
W
hether in investment or insurance planning, there is great importance to establish a philosophy. The purpose of the philosophy is to set forth a belief, a conviction, a doctrine, a theory behind the practice. The philosophy becomes a basis where all planning and execution start. It also ensures consistency in a professional service rm.
However, philosophies are not cast in stones. But by large, they hold true for most scenarios. Outliers are always there, but they should be taken care of separately, after being sure that they are really, outliers. And we will not know, unless we have already a philosophy that we can anchor on. As the saying goes, "if you stand for nothing, you will fall for anything." The philosophy and in this case, insurance philosophy, is where we can stand upon when we plan our insurance needs.
PROVIDEND AND DIYINSURANCE’S INSURANCE POLICY The primary purpose of insurance is for protection and not savings and investments. For if we want to save and invest, there are plenty of options (see below for the many options available to investors). There is no need to use insurance. Insurance (less annuities) is not the best instrument for savings and investments. This is because, for the low returns, the lack of liquidity and exibility just do not justify it. And if insurance is primarily for protection, we should buy as much as we need but spend as little as we can on it. This is because, insurance is a risk management tool. We really don’t want to “use” it. As such, we should minimise this expense so that the cost (premiums) vs benets (coverage, sum assured) is reasonable and justiable. In minimising expenses spent on a risk management tool, we also free up nancial resources to achieve our other life goals, such as accumulating for retirement, funding children’s tertiary education and also, live an enjoyable life now. In executing this philosophy, we make the following reasonable assumptions: 1. If we are nancially savvy, we may make nancial and investment decisions without an adviser 2. If we are not nancially savvy, or we don’t have time, we should work with a trusted adviser 3. We have limited nancial resources but unlimited wants & many needs But before we go and talk about protection, let’s look at some of the possible savings and investment options for investors. 14 Chapter 1
SOME SAVINGS AND INVESTMENT OPTIONS Here are some of the broad asset classes investors can invest into: Investment Options Cash (e.g. Fixed Deposits)
Estimated Expected Returns
0.05% - 1.8% p.a.
Estimated Volatility
Advantages
1. Very low risk of capital loss
N.A.
1. Regular xed income
Bonds (e.g. investmentgrade SGD issues)
1.8% - 4.5% p.a. (assume tenure of up to Relatively low 10 years)
Equities 4.5%-7% p.a. (e.g. Global)
Commodities 3% p.a. (e.g. Gold)
Relatively high
Relatively high
1. Very low returns and are unlikely to keep up with ination over the long term, so the real returns (which take ination into account) are likely to be negative 1. Returns are relatively low (compared to equities)
2. Maintain capital upon 2. Issuers of perpetual maturity (for bonds) or bonds have the option not call by issuer (for perpetual to pay coupons bonds) 3. In the event of a 3. Less risky/volatile default, the investor could (compared to equities) potentially lose all his capital 1. Potential high returns on capital 1. Risk of capital loss is relatively high 2. Dividend income 2. Price movements can 3. Transparent prices be very volatile 4. Good liquidity 1. Correlation with 1. Commodities are nonother asset classes is income-producing relatively low, making it a suitable asset class for 2. Price movements are diversication of risk generally speculative in nature 2. Ination hedge
Table 1.1: Broad asset classes that investors can invest in (cont in the next page)
15 Chapter 1
Disadvantages
Investment Options
Property (e.g. Singapore)
Estimated Expected Returns
5%-7% p.a.
Estimated Volatility
Relatively moderate
low
Advantages
Disadvantages
1. Subject to Government intervention measures 1. Potentially high returns (e.g. restrictions on on capital borrowing/high taxes on buying and selling) 2. Rental income 2. Generally requires a to 3. Correlation with large investment capital other asset classes is (unlike other asset classes) relatively low, making it 3. Relatively illiquid a suitable asset class for diversication of risk 4. Requires maintenance 5. Subject to taxes (e.g. property tax)
Alternative Investments (e.g. Hedge Funds/ Private Equity/Art and Wine etc)
1. Potential high returns 1. Returns can be very on capital unpredictable and volatile 5%-10% p.a.
Relatively high
2. Correlation with 2. It can be difcult to other asset classes is value the investment relatively low, making it holdings a suitable asset class for diversication of risk 3. Liquidity may be restricted
Table 1.1: Broad asset classes that investors can invest in (cont)
Here are some of the investment options in greater detail: Investment Options Savings Account
Minimum Investment Amount
N.A.
Minimum RSP Amount N.A.
Table 1.2: Investment options (cont in the next page)
16 Chapter 1
Advantages
1. No loss of capital
Disadvantages 1. Returns will not keep up with long-term ination, so capital is eroded when ination is taken into account
Investment Options
Minimum Investment Amount
Minimum RSP Amount
Advantages
1. No loss of capital
Fixed Deposit $1000
Singapore Government Bonds
$500
N.A.
N.A.
17 Chapter 1
1. Returns will not keep up with long-term ination, so capital is eroded when ination is taken into account
2. Returns generally higher than most savings accounts 2. Generally less liquid than a savings account 3. Good liquidity because if the depositor withdraws before maturity, the yield will be reduced 1. Returns will not keep up with long-term ination, so capital is eroded when ination is taken into account 2. Generally less liquid than a savings account because if the depositor withdraws before maturity, the yield will be reduced1. Returns will not keep up with longterm ination, so capital is eroded when ination is taken into account 2. Generally less liquid than a savings account because if the depositor withdraws before maturity, the yield will be reduced
Table 1.2: Investment options (cont)
Disadvantages
1. Returns are unlikely to keep up with long-term ination 2. If the investor withdraws before maturity, the yield will be reduced
Investment Options
Minimum Investment Amount
Minimum RSP Amount
Advantages
Individual Bonds or Perpetual Bonds (Perpetuals) Note: The above assumes investmentgrade issues. $250,000 Non-investment grade issues will have higher returns compared to investment-grade issues, but with higher risk of noncoupon payment and default, which would lead to capital loss.
1. Regular xed income
N.A.
3. Less risky/volatile 3. In the event of a (compared to equities) default, the investor could potentially lose all his capital
1. Regular income
$1,000
1. Returns are relatively low (compared to equities)
2. Maintain capital upon 2. Issuers of perpetuals maturity (for bonds) or call have the option not to by issuer (for perpetuals) pay coupons
Bond Mutual Funds Note: The above assumes bond mutual funds which are comprised mostly of short-term investment-grade issues. Longer-term, non-investmentgrade (high yield) bond mutual funds will have higher income payments, but with higher volatility and risk of capital loss.
Disadvantages
$100
1. The amount of the income payments are usually inconsistent and based on the net asset value (NAV) of the fund, not on the capital invested
2. Less risky/volatile (compared to equities) 2. Unlike bonds, bond mutual funds have no 3. More diversied maturity date. Hence holdings mean that even if volatility and the risk of an issuer were to default, capital loss is potentially an issuer were to default, higher for bond mutual the investor will not lose funds (compared to his entire capital (unlike bonds) buying a single bond or perpetual) 3. Returns are relatively low (compared to equities) 4. Costs are generally higher than Bond ETFs
Table 1.2: Investment options (cont)
18 Chapter 1
Investment Options
Minimum Investment Amount
Minimum RSP Amount
Bond Exchange Traded Funds (ETFs) Note: The above assumes bond ETFs which are comprised mostly of short-term investment-grade issues. Longer-term, non-investmentgrade (high yield) bond mutual funds will have higher income payments, but with higher volatility and risk of capital loss.
Advantages
1. Regular income 2. Less risky/volatile (compared to equities)
Depends on the relevant market; as low as the price of N.A. 1 share (U.S. market)
3. More diversied holdings mean that even if an issuer were to default, the investor will not lose his entire capital (unlike buying an individual bond or perpetual) 4. Generally lower costs compared to bond mutual funds
Disadvantages 1. The amount of the income payments are usually inconsistent and based on the net asset value (NAV) of the fund, not on the capital invested 2. Unlike individual bonds, bond ETFs have no maturity date. Hence volatility and the risk of capital loss is potentially higher for bond ETFs (compared to individual bonds) 3. Returns are relatively low (compared to equities)
Individual Equities Note: The above assumes mid to large market capitalisation companies in exchanges with good liquidity. Small market capitalisation companies and/ or exchanges with poor liquidity may have wide bid-ask spreads or little to no liquidity.
1. Potential high returns on 1. Risk of capital loss is capital relatively high Depends on the relevant market; as low as the price of N.A. 1 share (U.S. market)
2. Dividend income 3. Transparent prices 4. Good liquidity
Table 1.2: Investment options (cont)
19 Chapter 1
2. Price movements can be very volatile 3. Can be stressful and time-consuming
Investment Options
Minimum Investment Amount
Minimum RSP Amount
Advantages
Disadvantages 1. Fees are relatively high (compared to exchange-traded funds)
1. Potential high returns on 2. Fund performance capital can be inconsistent
Equities Mutual Funds Note: The above $1,000 assumes traditional, long-only equities funds.
$100
2. Some equity funds pay 3. Most funds a regular dividend income underperform their benchmarks in the long 3. Diversied holdings run mean that even if a few companies in the portfolio 4. Fund manager were to do very badly, may engage in 'style the overall impact to the drift', meaning that portfolio will not be too he manages in a way signicant that differs from the investment purpose of a portfolio, which may cause difculties in asset allocation 1. Potential high returns on capital 2. Some equity funds pay a regular dividend income
Equities ETFs Depends on the relevant Note: The above market; as low as the price of N.A. assumes traditional, 1 share (U.S. market) unleveraged, longonly equities ETFs.
3. Diversied holdings mean that even if a few companies in the portfolio were to do very badly, the overall impact to the portfolio will not be too signicant
1. More risky/volatile than cash/xed income asset classes 2. Will not outperform the benchmark
4. Lower costs compared to a equities mutual fund 5. Consistent performance
Gold and silver coins/ certifcates/
Less than $100
N.A.
bars/savings accounts Table 1.2: Investment options (cont)
20 Chapter 1
market
1. Traditional hedge 1. Prices can be volatile against long-term ination 2. Usually involves 2. Safe haven currency storage costs
Investment Options
Minimum Investment Amount
Minimum RSP Amount
Advantages
Disadvantages
1. Performance can be very volatile, particularly 1. Capital appreciation due to mining stock and hedge against ination investments
Commodities $1,000 Mutual Funds
$100
2. Usually invests into mining companies along with physical commodities which can give higher returns 1. Hedge against long-term ination
Commodities ETFs
Depends on the relevant market; as low as the price of N.A. 1 share (U.S. market)
2. Fees can be relatively high 3. May not provide the pure gold/silver exposure that the investor is looking for 1. Prices can be volatile
2. Safe haven investment
2. There may be less liquidity in exchanges 3. Allows exposure to where there are lower gold/silver/ almost any trading volumes commodity at a relatively low investment amount with relatively low fees 1. Subject to Government intervention measures (e.g. restrictions on borrowing/high taxes 1. Capital appreciation on buying and selling) 2. Rental Income
Properties
Depends on type of property N.A. and market prices at the time
2. Generally requires a large investment capital 3. Correlation with (unlike other asset other asset classes is classes) relatively low, making it a suitable asset class for 3. Relatively illiquid diversication of risk 4. Requires maintenance 5. Subject to taxes (e.g. property tax)
Table 1.2: Investment options (cont)
21 Chapter 1
Investment Options
Minimum Investment Amount
Minimum RSP Amount
Advantages
Disadvantages
1. Capital appreciation
Real Estate Investment Trusts (REITs)
2. Regular dividend income 1. The underlying properties are subject to 3. Gain diversication in Government intervention property investments measures Depends on the relevant market; as low as the price of N.A. 1 share (U.S. market)
4. Correlation with other asset classes is relatively low, making it a suitable asset class for diversication of risk
2. Subject management fees
to
3. Performance is subject to management's competence
5. No need to manage the properties on your own 1. Fees are usually very 1. Potentially high capital high (typically a xed appreciation 2%p.a. fee and a 20% performance fee) 2. Strategies are usually meant to provide returns in Hedge Funds 2. Risk/volatility is At hedge fund's any market environment (Accredited Investors Typically USD 1 mil usually high discretion Only) 3. Correlation with 3. Long-term other asset classes is performance can be relatively low, making it very inconsistent a suitable asset class for 4. Liquidity may be an diversication of risk issue 1. Fees are usually very 1. Potentially high capital high (typically a xed appreciation 2%p.a. fee and a 20% performance fee) 2. Strategies are usually Private Equity meant to provide returns in 2. Risk/volatility is At fund Funds any market environment usually high (Accredited Investors Typically $100,000-$250,000 manager's discretion Only) 3. Correlation with 3.Long-term other asset classes is performance can be relatively low, making it very inconsistent a suitable asset class for diversication of risk 4. Liquidity may be an issue Table 1.2: Investment options (cont)
22 Chapter 1
Investment Options
Alternative Investments (E.g. Art/Wine/ Collectibles etc)
Minimum Investment Amount
N.A.
Minimum RSP Amount
N.A.
Advantages
Disadvantages
1. Potentially high capital 1. As values are appreciation dependent on supply and demand, the market 2. Correlation with values of such items can other asset classes is be unpredictable and relatively low, making it volatile a suitable asset class for diversication of risk 2. It can be difcult to value the items 3. One can actually enjoy the ownership of the item 3. Liquidity may be an (e.g. derive pleasure from issue admiring the artwork) 1. Returns can be unpredictable and volatile 2. It can be difcult to value the investment holdings
Alternative Investments Funds (E.g. Art/Wine/ Collectibles etc)
At fund At fund manager's discretion, manager's indicatively $10,000 discretion
1. Potentially high capital appreciation 3. Liquidity may be restricted 2. Correlation with other asset classes is 4. Fees are usually relatively low, making it high, with subscription a suitable asset class for fees, xed fees and diversication of risk performance fees similar to hedge funds 5. Funds may be unregulated by authorities, so invested capital may be at a higher risk
Table 1.2: Investment options
So once again, as we can see from the table above, there are so many options to save and invest. There is really no need and may not be advantageous to use insurance for saving and investing.
23 Chapter 1
THE THREE KEY QUESTIONS TO ASK BEFORE BUYING OUR INSURANCE So if insurance is primarily for protection, what do we need to do to ensure that we are adequately covered at the minimum cost? To be able to do that, we need to answer three fundamental questions 1. How long do we need insurance cover? 2. How much coverage do we need? 3. Which type of insurance is suitable, after answering question 1 and 2.
We will answer these questions over the next few chapters.
24 Chapter 1
Chapter 2 How Long Do We Need Insurance Converage For?
25 Chapter 2
DEATH/TOTAL PERMANENT DISABILITY (TPD) COVERAGE Why does one buy insurance that pays upon death/TPD? For most people, the primary reason is to replace loss of income for the family and dependants when the income earner is no longer around. There are other secondary reasons why people buy this type of insurance but we will discuss that later in this chapter. For now, let’s focus on people whom buy insurance for the purpose of income replacement. For this same group of people, the following situations are when such insurance is not or no longer needed: a. When there are no more dependants There will come a time in our life when we have no more dependants or they have become independent of us. Such situations are when: 1. Our children have all grown up and are working. Our parents are no longer around as they have predeceased us. 2. We are single and our parents, whom were dependent on us, have predeceased us. 3. Our children have all grown up and are working. Our spouse is working and can support himself/herself with his/her own income plus accumulated assets. b. And when our earned income is no longer needed There will also come a time in our life where we will no longer earn or need an income. Such situations are when: 1. We have retired. During this stage of our life, we will be living of f our retirement nest egg and our children if any, would be independent of us. If death occurs, there is no income to replace as we have already retired. 2. We have sufcient assets to fund the family lifestyle, even upon our demise. Assets can come in the form of property investments, stocks and shares, business and so on and so forth. Summary
So if we are buying insurance that pays upon death/TPD, for the purpose of replacing income loss, when we don’t have or no longer have dependants and when our earned income is no longer needed, there is no need for coverage. Our need for this kind of insurance is therefore temporary and not permanent.
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DREAD DISEASE/CRITICAL ILLNESS COVERAGE Why does one buy insurance that pays upon diagnosis of a dread disease (a.k.a critical illness)? There are 2 primary reasons: 1. To replace income loss as one might not be able to work due to illness 2. To pay for the cost of alternative medicine and care that may not be covered by hospital plans So if we are buying it for the purpose of replacing income loss, the following situations are when such dread disease insurance is not or no longer needed: a. When there are no more dependants
There will come a time in our life when we have no more dependants or they have become independent of us. Such situations are when: 1. Our children have all grown up and are working. Our parents are no longer around as they have predeceased us. 2. We are single and our parents have predeceased us 3. Our children have all grown up and are working. Our spouse is working and can support himself/herself with his/her own income plus accumulated assets b. When our earned income is no longer needed
There will also come a time in our life where we will no longer earn or need an income. Such situations are when: 1. We have retired. During this stage of our life, we will be living of f our retirement nest egg and our children if any, would be independent of us. If death occurs, there is no income to replace as we have already retired. 2. We have sufcient asset to fund the family lifestyle, even upon our demise. Assets can come in the form of property investments, stocks and shares, business and so on and so forth. And if we are buying it for the purpose of paying for the cost of alternative medicine and care that may not be covered by hospital plans, we will likely need this dread disease insurance for as long as we want it. When we no longer want this option, then we don’t need this kind of insurance anymore. 27 Chapter 2
Summary So if we are buying insurance that pays upon diagnosis of a dread disease, for the purpose of replacing income loss, there will come a time when we will no longer need it. This is when we don’t have or no longer have dependants and when our earned income is no longer needed. Our need for this kind of insurance is therefore temporary and not permanent.
But if we are buying it for the purpose of paying for the cost of alternative medicine and care that may not be covered by hospital plans, we will need this kind of insurance for as long as we want it. Our need for this kind of insurance is permanent and not temporary.
SOME OTHER REASONS WHY PEOPLE BUY INSURANCE THAT PAYS UPON DEATH AND/OR DIAGNOSIS OF A DREAD DISEASE 1. Paying off liabilities such as mortgage loans, car loan and other liabilities
Most of us will have some liabilities such as mortgage loans or car loans. When we pass away, we would want to ensure that these liabilities can be fully taken care of, so that we do not leave behind nancial burdens for our loved ones to undertake. The good thing about loans is that there is an end point to them. There will be a day when they will be fully repaid. So if we are buying insurance to allow our family to pay off these liabilities in the event of our unfortunate demise, there will come a time when we no longer need it, because the loans have been fully taken care of. Once again, our need for this kind of insurance is therefore temporary and not permanent. 2. Ability to fund children’s education upon demise
For those of us with children, we would have plans to accumulate towards funding their tertiary education. However, the concern is when death occurs, we may not have accumulated enough funds yet. Buying insurance to provide an immediate lump sum upon demise is useful. But if we survive till the time when the kids have graduated, such insurance coverage is no longer necessary. Once again, our need for this kind of insurance is temporary and not permanent. 3. Legacy planning & gifting
For more afuent individuals, many buy insurance for the purpose of legacy planning (leaving behind nancial wealth for the family) or gifting, usually for philanthropic reasons upon their demise. If we are buying 28 Chapter 2
insurance for these reasons, we will need it for as long as we live. It is a permanent need. However, we need to mention that there are many other ways of legacy planning and gifting that goes beyond insurance. But it is usually the more afuent that will consider it. Some common ways of gifting is through setting up a trust and putting into the trust properties, investment funds, etc. Of course, insurance has the advantage of setting aside a small capital (in the form of premiums) in exchange for a huge death benet. One can also place the insurance policy into the trust for the purpose of distribution, gifting upon demise. 4. Taking care of children with special needs
For those that may have children with special needs, we may want to ensure that our children can be well taken care of when we predecease them. Insurance is one way of solving this problem. There are 2 approaches to using insurance in this case. a. We can buy an insurance that covers us for as long as we live, so that when we pass on, the insurance proceeds will be able to take care of our children. b. We can buy an insurance that covers us till we retire. Meanwhile, we can accumulate towards an amount that will be sufcient to take care of our children, if death occurs after our retirement. So for this need, our need for insurance coverage can be a temporary or permanent need. 5. Providing for alternative medicine and care for children, in the event if they are diagnosed with a dread disease
One of the worries of parents is that our children may be diagnosed with a dread disease. So if we are buying insurance for the purpose of paying for the cost of alternative medicine and care that is not covered by hospital plans, we will likely need a dread disease insurance for as long as we want it. For this kind of coverage, our need is a permanent need. 6. Replacement of a keyman in an organization
In business, it is often difcult to replace the loss of a key man, such as a CEO or a key employee. The loss of a key man can result in potential business losses. The payout from insurance can replace this loss, until another suitable employee is found. If we are buying insurance for this purpose, we only need to cover the key man till his planned retirement or when he no longer works for the organization. Our need for this kind of insurance is therefore temporary. 29 Chapter 2
7. Funding a buy-sell agreement contract between business partners
In business, the death of a business partners can create havoc for the organization, especially so if the surviving owner may have to work with the family members, who have just inherited the shares of the deceased partner. One of the common solutions to solve this, is by way of a buy-sell agreement between partners, whereby both partners agree to sell to each other their shares upon one of their demise. But in order for the surviving partner to have immediate cash to buy the shares, the partners buy an insurance on each of the partners’ life. When there is a demise, the insurance paid out will be given to the deceased partner’s family, in exchange for his shares. If we are buying insurance for this purpose. We will need insurance coverage until the planned exit of the partners from the business. Our need for insurance in this case can be temporary or permanent, depending on when the partners planned for their exit. Although in our experience working with business clients, the need is usually temporary.
TYPES OF INSURANCE NEEDS Type of Need
How Long Do You Need Remarks
Replacement of income due to death and TPD of income earner Replacement of income due to diagnosis of dread disease of income earner Paying for alternative medicine and care for one who suffers from dread disease
Temporary - We need it only for a period of time Temporary - We need it only for a period of time Permanent - We need it for as long as you live Temporary - We need it only for a Paying off liabilities such as mortgage period of time Funding children’s tertiary education even Temporary - We need it only for a after demise period of time Permanent - We need it for as long Legacy planning and gifting as you live Taking care of children with special needs Can be temporary or permanent Providing for alternative medicine and care for children, in the event if they are diagnose with a dread disease Replacement of a keyman in the organization Funding a buy-sell agreement contract between business partners
Higher priority planning need by most people Higher priority planning need by most people Only if we want this as an option and have a conviction in alternative medicine Higher priority planning need by most people Higher priority planning need by most people Usually done by the more afuent and not a rst priority planning need by most of us Most of us do not have children with special needs
Permanent - We need it for as long Only want this as an option and has conviction as you live in alternative medicine Temporary - We need it only for a Most of us are not keyman in an organization period of time Can be temporary or permanent
Table 2.1: Types of insurance needs and whether temporary or permanent?
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Can be temporary or permanent
What if I know that I only need insurance coverage temporarily but I don’t mind paying more for coverage for my entire life?
Today if we have unlimited resources, and insurance needs are our only concern, we can buy as much insurance for as long a cover as we want, even if we don’t need it. Unfortunately because we have limited income, but unlimited planning needs, we really need to prioritise our needs. For every extra dollar we pay to buy insurance that we don’t need, it simply means we will have lesser money to save and invest towards our life goals, such as retirement and accumulating towards children’s education. Remember that when we plan for ourselves nancially, we are really planning to live and not to die! We buy insurance as a “contingency plan”. We don’t really want to use it. We have insurance, just in case if the unforeseen happens, and we are no longer able to earn an income, an insurance payout allows us and our family to carry on with life. So if we buy so much insurance, and especially coverage that we don’t need, leaving insufcient nancial resources to save for our life goals, the only way for our family to achieve their life goals is to delay the achievement of these goals (such as retirement) or for us to die so that the insurance payout will fund our lives! What a joke that will be, isn’t it? Conclusion
So how long do we need insurance cover? Based on the above discussion, we will realise that in almost all situations, especially the higher priority planning needs, we don’t need it forever. We only need it for a period of our life, when we are still earning an income, or have dependants that need the income. The only main exception, is, if we are buying insurance for the purpose of paying for alternative medicine or care. And this is provided that we want this option and have a conviction for the use of alternative medicine. In other circumstances where we need insurance cover for as long as we live, such as 1. Legacy planning and gifting 2. Taking care of children with special needs 3. Funding a buy-sell agreement between business owners (which in many instances, could also be a temporary need) These are either not higher priority planning needs or they are unique circumstances for the minority. 31 Chapter 2
Advisers may argue that clients and not advisers, should determine what their higher priority planning needs are. We submit that as professional advisers, there are times when we must exercise our responsibilities and obligations to our clients, in advising them what is right for them. If we are always giving in to clients every want, we are not advisers, but we become salespeople.
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Chapter 3 How Much Insurance Do We Need?
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W
e do not think it is right to just use the rule of thumb way (such as 10% of your income going into insurance or insure yourself up to 10 times of your annual income) when it comes to nancial planning and in this case, insurance planning. We are convinced that a better way is to understand the needs of each individual. Some of the factors that differ from person to person, that will affect how much insurance a person needs are: 1. How much of our monthly income do we need to replace on our unfortunate demise? 2. How many years do we need to replace this income for? 3. Do we need to pay off our liabilities (such as mortgage) upon our demise? 4. Do we need to fund our children’s tertiary education, even after our demise? 5. What is our current insurance situation and how much assets do we have now?
And of course, there could be additional factors, depending on our situation. Using a case study of 2 different individual proles of Tony and Peter, we did a needs analysis for them to determine their needs if death or total and permanent disability were to occur. Scenario: Male, Age 45 (DOB 010171), Non-smoker, family with 1 child Profle Monthly Income
Tony
Peter
$3,500
$10,000
Monthly Income Provided for Dependents
$2,625
$7,500
Dependency Period (years)
15
15
Income Replacement
$472,500
$1,350,000
Children Tertiary Education
$88,400
$177,000
Home Loan & Liabilities
$166,875
$462,500
Table 3.1: Needs analysis for death, TPD coverage (cont in the next page)
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Remarks Assumption: 75% of income used to provide for dependents needs Assumption: ination-adjusted returns at 0% to keep pace with ination
Guided gures: 4 years non-medicine study & 5-year medicine study respectively in local university
Profle
Tony
Peter
Total Death Needs:
$727,775
$1,989,500
Existing Death Cover Current Assets for Consumption Shortfall / (Surplus) in coverage:
$200,000
$600,000
$30,000
$400,000
$497,775
$989,500
Remarks Assumption: No existing death coverage - scenario used to illustrate actual shortfall in protection Assumption: Cash in bank and investments
Table 3.1: Needs analysis for death, TPD coverage (cont)
Using the same case study, we did a needs analysis for them to determine their need of replacing their income if they were to be diagnosed with critical illness or dread disease.
Monthly Income No. of years of income that needs to be replaced Total needs Existing insurance Shortfall
Tony
Peter
$3,500
$10,000
3
3
$126,000 $0 $126,000
$360,000 $0 $360,000
Table 3.2: Need analysis for critical illness coverage
Based on the above analysis, for the purpose of replacing income, cancelling liabilities and funding children’s education upon demise or total and permanent disability: a. Tony will need an additional of about $500,000 coverage b. Peter will need an additional of about $1 million coverage Based on the above analysis, for the purpose of replacing income upon diagnosis of critical illness or dread disease: a. Tony will need an additional of about $130,000 coverage b. Peter will need an additional of about $360,000 coverage Tony and Peter has also indicated that they want the option of paying for alternative medicine, which might not be covered under hospitalisation and surgical insurance. The amount each of them want is $50,000.
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Death/TPD Coverage Needs Critical Illness Coverage (Replacement of income) Alternative Medicine Payment
Tony
Peter
$500,000 $130,000
$1,000,000 $360,000
$50,000
$50,000
Table 3.2: Need analysis for critical illness coverage
To calculate your own life insurance needs, you can go to: http://www.diyinsurance.com.sg/portal/calculators/life-insurance-calculator To calculate your own critical illness needs, you can go to: http://www.diyinsurance.com.sg/portal/calculators/critical-illness-calculator
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Chapter 4 Which Type Of Insurance Is Suitable To Cover Our Needs?
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There are 4 main types of insurance that pay out upon death, total and permanent disability (TPD) and dread disease (critical illness): 1. Endowment
Endowment policies are designed to help us save for the future. We contribute a regular premium for a number of years and at the end of the policy duration we receive a lump sum maturity pay out. Some Endowment policies have a "Cash Back" feature, whereby yearly cash benets are given at specied years in addition to the maturity pay out. As endowment plans are mainly meant for savings, a much smaller portion of our premiums are used to pay insurance charges (mortality charge) that gives us the insurance coverage. Therefore, endowments are not suitable, if we are buying it for the purpose of protection. We have no objections if we are using it for savings, either towards our retirement fund or children’s education fund. But we are not big advocates about endowments, simply because the returns may not be sufcient for us to achieve our goals, and also because of its inexibility. In addition, we have given many other savings and investment options in Chapter 1. So if we want to buy an endowment plan, do consider if they are enough for us to reach our goals. We might need to supplement it with other options. To understand more about endowments, we might like to read the following educational articles: Choosing the Right Endowment 4 Endowment Plans Specially Designed For Your Child's Education 2. Investment-Linked Policy (ILP)
ILPs are insurance policies that combine life insurance coverage with investments into unit trusts. Part of our premiums goes to pay for insurance charges that pay for the cost of insurance benets, and part of it is used for investing. The investment value is liquid and it can be withdrawn from anytime. For a regular premium ILP, the policyholder determines the annual premium amount, which stays level, as well as the percentage allocations to insurance charges and investments. However, ILPs are usually structured such that the insurance charges increase over time, which means that the remaining portion of the premiums that goes into investments shrinks over time. We have written an article on why we do not advocate ILP at all. We can read more about it here. 38 Chapter 4
In gist, the main reason why we do not advocate buying an ILP is that we are limited by the choice of funds (unit trusts) that are being sold by that insurer. And if we are really keen to invest in unit trusts, there are plenty of choices outside the ILP space, why do we want to tie our hands unnecessarily? As such, we do not advocate using ILPs for the purpose of protection. 3. Term Plan
A term plan is one where by we only pay for pure protection. We do not give extra money to the insurance companies for them to invest it into their life fund. We also decide how long we want to cover ourselves for, using a term plan. As such, when a term plan runs its course, we no longer have any cover and also we do not get any money back. Because of this, the premium for term plans is very low, for the same amount of coverage we would have paid for using a whole life plan or an ILP. As such, term plan is the most affordable way for us to be fully covered for our needs.
SOME ADVANTAGES AND DISADVANTAGES OF TERM PLANS Features of Term Plan
Advantages 1. Premium is low and very affordable. We can afford full coverage of our needs
Pure insurance coverage with no investment component We decide the term of coverage No cash value
2. We only pay what we need - insurance But that is what insurance should be for - protection, not savings or investments. We can decide how many years of coverage we need and we pay for what we need. No money wasted and premium is affordable. As there is no investment component in term plans, there is no cash value, simply protection. But that is what insurance is for - protection, not savings or investments. And because there is no cash value, we can terminate this plan anytime when we don’t need it, or there is a better plan out there. There is no fear of not being able to breakeven our premium paid.
Table 4.1: Advantages of term plans
Features of Term Plan
Disadvantages
Remarks
No more coverage after term ends
We may be afraid that when the term plan ends, we might have miscalculated in that we have yet to retire or our retirement has been delayed, due to unforeseen circumstances. We might still need the coverage but now we have none.
This can be easily solved by giving ourselves a buffer in our planning. Instead of buying a term till 60 or 65, we can stretch it until aged 70. If we retire earlier than 70, we can always terminate it earlier without fear of losing cash value, etc. It is simple, no complications.
Table 4.2: Disadvantages of term plans (cont to next page)
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Features of Term Plan
Disadvantages
Remarks
No cash values - cannot do automatic premium loan (APL)
An APL is an insurance policy provision that allows the insurer to deduct the outstanding premium amount from the cash value if the insured does not pay it after the grace period (30 days). This ensures that the policy will not lapse if the premium is not paid. Because term plans have no cash value, if we forget to pay premium, after 30 days, a term plan may lapse.
While having an APL feature is useful, to buy a high premium whole life plan, just to hedge against forgetfulness to pay insurance premium does not make sense. One can easily prevent it from happening by setting up a direct debit facility with the bank to do regular premium deduction.
No cash values - After term ends, no money back
The primary purpose of insurance is for protection, not savings or investment. For if we want to save or invest, there No cash values - After term ends, no are many other options available as money back described in Chapter 1. Furthermore, having no cash value makes terminating a policy when we need to, easier. No fear of not breaking even our premium paid.
Table 4.2: Disadvantages of term plans
In our experience working with clients over the past almost 2 decades, many have told us that they bought whole life plans because they get some returns on the premiums they paid from whole life insurance whereas from term plans, they get nothing back at the end of say, 20 years. But this is a misunderstanding because the only reason why they get something back from whole life plan is because they gave the insurance company extra money above the insurance cost to invest. The insurance cost they paid for their protection portion of whole life plans has no return. It is an expense, just like term insurance. 4. Whole Life Policy and Whole Life Hybrid Policy
A whole life plan is one where we get permanent coverage - meaning that the insurance policy will continue for as long as we live. It used to be that we will also need to pay our premiums for as long as we live as well. However, nowadays, insurers are coming out mostly with limited pay whole life plans where we only pay for a limited period of your life, for example, till age 70 years old but the coverage is for as long as we live. So it seems like a steal, isn’t it? Well, we all know there is no free lunch. What this means is that the insurance companies have already calculated the amount that we didn’t have to pay from, say aged 70 and brought forward so that we pay more premium per year, till aged 65. The premium for whole life plan is high because for every dollar that we pay, a small proportion of it is taken to pay for insurance cost (mortality charge) and the rest is invested into the insurance companies' life fund. The life fund return is currently projected between 3.25% - 4.75% p.a. This is of course not guaranteed. What 40 Chapter 4
that means is that even if the life fund can return 4.75% p.a., we will only get 4.75% p.a return on the portion of the premium that is invested into the life fund. The portion of the premium that is paid for insurance cost is an expense. There is no return. Increasingly, we see insurance companies launching what are known as “Whole Life Hybrid” products. These Increasingly, are packaged products that put a whole life plan and a term plan together. How a hybrid can be structured might be like this: A $50,000 whole life plan is packaged together with a $100,000 term plan that run till aged 70. So we get covered say $150K plus cash values for death, total and permanent disability, if it happens before say aged 70. If death, total and permanent disability happens after aged 70, we only get covered $50,000 plus cash value. Hybrid plans are cheaper than pure whole life plans for the same coverage because of the embedded term component. But the premium is still much higher relative to a term plan.
SOME ADVANTAGES AND DISADVANTAGES OF WHOLE LIFE PLANS Features of Whole Life Plan Advantages
Automatic Premium Loan - APL
Paid-up Policy
An APL is an insurance policy provision that allows the insurer to deduct the outstanding premium amount from the cash value if the insured does not pay it after the grace period (30 days). This ensures that the policy will not lapse if the premium are not paid. When the insurer deducts from our cash value, we are effectively taking a loan from the insurer. If we want to pay back the premium amount back into the cash value, we have to pay the insurer an interest. If we do not wish to continue paying the premium or, if we cannot afford the premium, we can request the insurer to lower our sum assured to a level whereby they estimate that the cash value of our insurance policy is sufcient to pay our monthly premium for our new lowered sum assured, until we probably pass away.
Table 4.3: Advantages of whole life plans (cont to next page)
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Remarks While having an APL feature is useful, to buy a high premium whole life plan, just to hedge against forgetfulness to pay insurance premium does not make sense. One can easily prevent it from happening by setting up a direct debit facility with the bank to do regular premium deduction. In addition, we have to pay an interest to the insurer for the loan taken.
While this gives us some exibility if we can no longer afford our premium, our sum assured is reduced and we may not be sufciently covered. Also, if we surrender this policy subsequently, we won’t have much much cash value to take back.
Features of Whole Life Plan Advantages When we surrender the policy, policy, we get back some money. Whether the amount we get back will be more than the premium paid depends on how well the life fund has done and when we surrender it. Early surrender usually mean inability to breakeven our premium paid.
Has cash value
Due to the policy bonus that is declared regularly, the protection value may Higher death benet pay out than the increase over time as bonus is declared amount we initially bought when the insurance companies' life fund performance is good. This may help to mitigate the effects of ination
Remarks The primary purpose of insurance is for protection, not savings or investment. For if we want to save or invest, there are many other options available as described in Chapter 1. 1. Furthermore, having cash value makes terminating a policy when we need to, complicated. There is a fear of not breaking even our premium paid if we terminate early. early. While mitigating the effects of ination is important, the high premium of whole life plans may only afford us a much lower coverage than what we actually need. Buying a low cost term plan with a slightly higher coverage than what we need will easily solve the problem of hedging against ination.
Table 4.3: Advantages of whole life plans
Disadvantages of Whole Life Plan
Remarks
When we buy a whole life plan, we are paying for insurance coverage for as long as we live. Disadvantages of Whole Life However, as we have discussed above, in most situations, we only need coverage for a period Plan of time. As such, we are paying premiums for what we don’t need. The primary purpose of insurance is for protection, not savings or investment. For if we want to save or invest, there are many other options available as described in Chapter 1. 1. Furthermore, having cash value makes terminating a policy when we need to, complicated. There is a fear of Returns not breaking-even. That if we terminate early, we may have paid more premium than the cash value we would receive. If we are depending on this “return” for the purpose of saving towards retirement, the return might not be enough to reach our goals. Having cash value makes terminating a policy when we need to, complicated. If we terminate early, there is a fear of not breaking-even. Over the years, insurers are coming out with good Inexible term plans with very competitive premium. But even if we are healthy enough to switch plans, we might nd it hard to do it because of this consideration. The biggest disadvantage of whole life plan is that the premium is so high that we might not be High premium able to afford the cost to provide full coverage of our needs. This defeats the primary purpose of insurance, which is to give us sufcient protection against our risks. Table 4.4: Disadvantages of whole life plans
Many people buy whole life plans for dual purpose: coverage and saving for retirement. The problem with this approach is that because whole life’s premium is too high for us to afford ourselves full cover, and the return is probably too low for us to reach our retirement goal, we end up not achieving both objectives. We are stuck in the middle.
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So whilst whole life plans are meant for protection purpose, the premium is expensive because: 1. There is an investment component 2. The protection is for the entire life As we have said the primary purpose purpose of insurance is for protection and not saving or investment, the question question really is: Should we use term or whole life plan to meet our insurance needs? To To answer this question, let’s put all our discussion in the previous chapters together
Higher Priority Needs
How Long Do You How Much Need Coverage? Insurance?
*Whole *Whole Life Life Plan Hybrid Premiums Premiums (p.a.) (p.a.)
*Term Plan Recommended Premiums Plan (p.a.)
Tony - $14,320 $14,3 20 Tony - $5,761
Tony - $1,922
1. Income replacement due to death and TPD 2. Repayment of all liabilities
Temporary - You Tony - $500K only need it for a Peter: $1 mil period of time
3. Funding of children’s tertiary education need upon demise Income replacement Temporary - You Tony - $130K only need it for a Peter - $360K due to period of time critical illness
Peter -$28,640 Peter -$11,189 Peter - $2,913
Tony – Peter –
Table 4.5: Term or whole life? (cont to next page)
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Tony – Peter –
Term Plan
Tony - $1,699 Peter - $3,810
Term Plan
Higher Priority Needs
How Long Do You How Much Need Coverage? Insurance?
Income replacement Permanent (due due to to the desire to critical have the option illness + for alternative Alternative medicine and care) medicine and care
Tony - $130K Peter - $360K
Tony - $50k Peter - $50K
*Whole *Whole Life Life Plan Hybrid Premiums Premiums (p.a.) (p.a.)
Tony - $6,439 (combined $180K coverage)
Tony - $3,061 (combined $180K coverage)
*Term Plan Recommended Premiums Plan (p.a.) Term Plan (to cover income replacement) Tony - $1,699
Peter - $3,810 Whole Life Hybrid (as premium for whole Whole life life hybrid is cheaper Peter- $14,666 Peter - $6,720 (to cover for than buying term and (combined (combined alternative whole life separately) $410K $410K medicine and coverage) coverage) care) Tony - $1,814 Peter -$1,814
Table 4.5: Term or whole life? *We used the lowest premiums based on the 5 insurers we compared. Please go to appendix 1- 4 (Table A) for a detailed breakdown of the various insurance companies’ premiums. The premium for the whole life and whole life hybrid is over a limited period of 25 years.
Conclusion
Based on our discussion so far, we can safely conclude that term plans are the most suitable plans for most people with higher priority needs. It is the most suitable because all of our higher priority needs are temporary needs. Secondly, as our need for coverage is quite high, it will simply be too expensive to use whole life plan to cover ourselves fully. However, if we want the option of providing a lifetime of alternative medicine and care, then a whole life or a whole life hybrid insurance plan may be more appropriate. Many a times, when we advocate the use of term plan for insurance planning purpose, people often question whether we are too broad stroke, too presumptuous to assume that all clients’ need are the same. Many have commented that we should not be one size t all in our approach. The truth is, we agree that we should customise recommendations based on clients’ needs.
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But the customisation is based on how much coverage one needs, based on the different factors which we have described above. After calculating the coverage amount needed, we can see that term plan is the most suitable, because all of our higher priority needs are temporary needs and the amount of coverage needed is usually too large to use a whole life plan to cover cost effectively. Can someone insist on using whole life plan to cover that amount? The answer is obviously yes. But not many people can afford the premium and this person must have so much nancial resources that after buying all the insurance he needs, he still has enough to plan for other areas of his life. Because of the above, we strongly advocate term plan as the insurance plan of choice, once the amount of coverage is established.
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Chapter 5 Why Are More Whole Life Plans Sold Rather than Term Plans?
46 Chapter 5
C
ongratulations, for reading up till this chapter. By now, we will begin to understand why term plans are the most suitable plans to use for our higher priority needs. But the question we might have on our mind is: if term is more suitable, why then are there more whole life plans being sold, rather than term plans? To begin answering this question, let us rst verify if this statement is indeed true: Are there more whole life plans being sold in Singapore rather than term plans? Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Whole Life (%) 24.90 15.90 7.02 18.43 13.20 2.95 10.99 9.21 8.81 7.76 8.05 7.45 8.23 8.83 8.29
Endowment (%)
Term (%)
Others (%)
Total (%)
34.50 57.90 18.33 36.91 38.40 5.97 23.93 20.21 23.08 19.29 19.73 20.88 18.98 21.33 22.73
6.70 4.90 2.15 7.29 9.50 68.91 23.51 21.70 16.3 15.29 13.18 13.29 14.59 11.26 11.02
33.90 21.30 72.50 37.37 38.50 22.17 41.58 48.87 16.3 57.66 59.04 58.38 58.20 58.58 57.56
100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
Table 5.1: Distribution of new individual business (non-linked) Source: MAS
From the table above, we can see that prior to 2005, there are indeed a higher propor tion of whole life plans being sold rather than term plans. In fact, though not shown in this table (but we can refer to MAS website), if we go back even to the mid 90s, we will see that there are also a higher proportion of whole life plans being sold. This is not surprising because term plans weren't popular back then. In 2005, the data was skewed as we can see a big spike in the proportion of term plans being sold (68.91% of the total non-linked plans). According to Life Insurance Association (LIA), it is understood that the privatisation of Dependent Protection Scheme (DPS) has caused the huge increase. It used to be that DPS was administered under CPF Board. But in 2005, it was privatised and all CPF members who bought DPS would either purchased
47 Chapter 5
through Great Eastern Life or NTUC Income. This explain a jump in the proportion of term plans sold in 2005 as DPS are term plans. But one thing is clear, from 2000 onwards, we see a change in trend, the proportion of whole life plans being sold decreased steadily as term plans picked up pace. One more thing to note: From 2013 onwards, term plans sales started coming down, with no increase in the proportion of sales of whole life plans. Where did the decrease in proportion of sales in term plans go to? We will notice an increase in percentage in the category “others”, which we could not nd an explanation on what it constitutes on the MAS website. Summary
It is true that more whole life plans (relative to term plans) were sold in the past. However, from 2000 onwards, the proportion of sales of whole life plans started dropping. Instead, the proportion of term plan sales started increasing steadily. We believe the reasons why this is so because: 1. A lot more were written about term versus whole life insurance. When we started writing about term insurance in 2003, we faced a lot of ak from the industry. At that time, very few, in fact, almost no one in the industry wrote about term insurance. Today, we see journalists, magazine writers, and nancial bloggers writing more and more about term insurance. Even some advisers are beginning to see the advantages of term over whole life insurance. 2. Consumers are more educated today and are beginning to understand the advantages of term plans. Again, since 2003, almost all our clients who passed through Providend and DIYInsurance bought term insurance through us. 3. The insurers are coming out with better term products with more competitive prices. So why is it so, that in the past and even now, many people still buy whole life insurance? Besides the fact that many consumers and advisers out there are still not aware of the advantages of term versus whole life insurance, we believe that the key reason is because of compensation. What do we mean? Using the same case study of Tony and Peter, we look at the various insurance plans that we can use to meet their needs.
48 Chapter 5
Death/TPD Coverage Needs Critical Illness Coverage (Replacement of income) Alternative Medicine Payment
Tony
Peter
$500,000
$1,000,000
$130,000
$360,000
$50,000
$50,000
Table 5.2: Summary of coverage needs
1. Tony: Possible insurance plans to cover $500,000 death/TPD
We compared the premium cost using term plans, whole life plans, whole life hybrid plans in order for Tony to meet his shortage of $500,000 coverage in the event of death and TPD and also put up the agent’s rst year commission if he has sold each of the plans. We only show the rst year commission because although commissions can be paid over a number of years, the rst year commission is typically the highest and it is enough to show the difference without making it overly complicated for readers to understand. In the tables below, the premium for the whole life and whole life hybrid is over a limited period of 25 years. In order to make this segment more readable, we show the comparison of just one company. You can go to the Appendix 1 (Table A and B) to see the comparison between other companies. Term Plans Premium Company B $1,922 (Premium p.a.) Agent’s First $748 Year Commission
Traditional Whole Life Plans
Whole Life Hybrid Plans
$15,670
$7,410
$7,052
$3,335
Table 5.3: Various insurance options for Tony and agent’s rst year commission for these options
Conclusion 1: For the same amount of coverage, the premium are a lot higher if you buy traditional whole life plans or whole life hybrid plans. As a result of this, agents get higher commission selling traditional whole life or whole life hybrid plans.
49 Chapter 5
2. Tony: Possible insurance plans to cover $130,000 for replacement of income due to critical illness and $50,000 for alternative medicine and care
We compared the premium cost using term plans, whole life plans, whole life hybrid plans in order for Tony to meet his shortage of $130,000 coverage in the event of critical illness as well as $50,000 in the event Tony wants an option to pay for alternative medicine (due to critical illness) and care. You can go to Appendix 3 (Table A and B) to see the comparison between other companies. There are a few options to solve Tony’s problem and the table below shows the various combination. (a) For income replacement need ($130,000) Option 1 Option 2 Option 3 $130,000 Term Plan $130,000 whole life $130,000 whole life (till aged 70) plan hybrid Company C (Premium p.a.) Agent’s First Year Commission
$1,700
$4,884
$2,484
$612
$1,905
$969
Table 5.4: Various insurance options and agent’s rst year commission for these options
(b) For income replacement ($130,000) and alternative medicine provision ($50,000) Option 1 Option 2 Option 3 $130,000 Term Plan $180,000 whole life $180,000 whole life (till aged 70) + plan hybrid $50,000 whole life plan Company C (Premium p.a.) Agent’s First Year Commission
$1,700 + $1,986 = $3,686
$6,763
$3,249
$612 + $774 = $1,386
$2,637
$1,267
Table 5.5: Various insurance options and agent’s rst year commission for these options
Conclusion 2: If you are just buying critical illness plan for the purpose of replacement of income (higher priority need), the premium (and therefore the commission) for term insurance is lower than whole life plans and whole life hybrid plans. But if you want the additional option of buying critical illness for the 50 Chapter 5
purpose of providing alternative medicine and care, buying a whole life hybrid plan makes sense as the premium is slightly lower. 3. Peter: Possible insurance plans to cover $1,000,000 death/TPD
We compared the premium cost using term plans, whole life plans, whole life hybrid plans in order for Peter to meet his shortage of $1,000,000 coverage in the event of death and TPD. You can go to Appendix 2 (Table A and B) to see the comparison between other companies. Term Plans Premium Traditional Whole (p.a.) Life Plans (Term till age 70) Premium (p.a.) Company B (Premium p.a.) Agent’s First Year Commission
Whole Life Hybrid Plans (Premium p.a.)
$2,913
$31,340
$14,720
$1,133
$14,103
$6,624
Table 5.6: Various insurance options for Peter and agent’s rst year commission for these options
Conclusion 3: For the same amount of coverage, the premium are a lot higher if you buy traditional whole life plans or whole life hybrid plans. As a result of this, agents get a higher commission selling traditional whole life or whole life hybrid. 4. Peter: Possible insurance plans to cover $360,000 for replacement of income due to critical illness and $50,000 for alternative medicine and care
We compared the premium cost using term plans, whole life plans, whole life hybrid plans in order for Peter to meet his shortage of $360,000 coverage in the event of critical illness as well as $50,000 in the event Peter wants an option to pay for alternative medicine (due to critical illness) and care. You can go to the Appendix 4 (Table A and B) to see the comparison between other companies. There are a few options to solve Peter’s problem and the table below shows the various combinations.
51 Chapter 5
(a) For income replacement need ($360,000) Option 1 Option 2 Option 3 $360,000 Term Plan $360,000 whole life $360,000 whole life (till aged 70) plan hybrid Company C (Premium p.a.) Agent’s First Year Commission
$4,662
$13,010
$6,242
$1,678
$5,074
$2,434
Table 5.7: Various insurance options and agent’s rst year commission for these options
(b) For income replacement ($360,000) and alternative medicine provision ($50,000) Option 1 Option 3 $360,000 Term Plan Option 2 $410,000 whole life (till aged 70) + $410,000 whole life hybrid $50,000 whole life plan plan Company C (Premium p.a.) Agent’s First Year Commission
$4,662 + $1,986 = $6,648
$14,817
$7,110
$1,678 + $774 = $2,452
$5,779
$2,773
Table 5.8: Various insurance options and agent’s rst year commission for these options
Conclusion 4: It is cheaper to buy a term plan to cover your need of income replacement due to critical illness. If you want the option of providing alternative medicine and care, buy a term policy and a whole life plan separately. Alternatively, if you are prepared to pay a bit more, you may also consider getting a whole life hybrid instead to take care of both needs. So what do the 4 conclusions tell us?
For all our higher priority needs, not only does it make sense to buy a term plan (as we have explained in chapter 4, in terms of commission, we also pay (and agents/advisers get) lower commission. You only consider a whole life or a whole life hybrid plan if you want the option of alternative medicine and care. We want to clarify that we are not saying that all agents and nancial advisers out there are simply selling whole life plans/whole life hybrid to consumers because they are paid better. In fact, we know that there are
52 Chapter 5
agents and advisers who do the right thing, even though they are paid lesser. These agents/advisers truly look after the interest of the clients and they need to be recognised. However, the truth is, compensation does drives behaviour. As long as there is a huge difference in commission between term, whole life, and whole life hybrid, there is always that temptation for us to sell products that pay better, especially so, if sales awards, incentives, promotions are tied to the amount of sales we bring in. As we have painstakingly explained, for our higher level needs, our need for insurance is temporary. And for us to be fully covered, the premium for whole life plans are so expensive that most of us will not be able to afford it. Why then is it so that before 2005, there is a higher proportion of sales in whole life plans rather than term plans? And because a lot more people are sold whole life plans, many would have just bought what they can afford in terms of premiums and as a result, they are not fully covered. Perhaps this explains why we are an underinsured nation.
53 Chapter 5
Chapter 6 The Story Of Providend and The Birth Of DIYInsurance
54 Chapter 6
A
t the age of 27 years old, I started my career in the nancial services industry as an insurance adviser with a large insurer. I had wanted to be a nancial adviser then. But there was no such “animal” back in the late 90s as not only it was a new idea, the Financial Advisers Act was not put in place. You either join the insurance companies, the banks or the stockbroking house to do something like that. Although I was promised that I will get a chance to do nancial planning in the agency that I joined, I was never taught how to. In 1999, I discovered by accident that there were good books on how to write a nancial plan in NUS Hon Sui Sen Library. That was the beginning of my nancial advisory career. But, regardless of how good a plan I wrote for clients, I only had one product to implement their plans - insurance. And I was using lots of whole life insurance.
You see, back in my agency days, no one really talk about term plans. In almost all of our trainings, we were taught how to sell whole life plans, endowments and investment-linked policies to clients. These were the plans that pay us well and also allow us to achieve the coveted Million Dollar Round Table (MDRT), Court of the Table (COT) and Top of the Table (TOT) award. And in the 3 years I was with the insurance company, I did well. I was second top rookie adviser in my rst year and by the time I reached my third year, I was top 25 in the company. Besides being nancially well paid, every year, I get to go on 2-3 overseas incentive trips. Life was good. Sometime in early 2000, I read an article on Business Times, written by Ms Genevieve Cua. She interviewed US nancial planner Ms Suze Orman. In that article, it was reported that Ms Orman said something to the effect that “if you sell whole life plans to your clients, you are like serving them a plate of poison”. When I read that, I was of course fuming mad. I thought to myself back then: “how could she say such a thing?! This is not true!” I ignored what I read and continued selling whole life plans. For the next 6 months, what Suze Orman said kept coming back into my mind and troubled me. And after doing enough research and realised what she said was in many ways true, I could not take it anymore. I decided that if I want to leave the insurance company, I better leave when I was still young, where the recurring insurance commissions is still small and when I still have the courage to do so. At the peak of my insurance career, I left and subsequently set up Providend, Singapore’s rst fee-only rm on 11th September 2001. You can read more about Providend’s early days here. When Providend started, we wanted to build a company that represents “trust”. But how can we build trust? We decided that in order to do that, we must exist to give the most honest, independent and competent advice 55 Chapter 6
to our clients. So we structure the company to the best of our ability, to deliver honest, independent and competent advice. To give the most honest advice, we decided to be the rst fee-only rm in Singapore. What that means is that when clients take advice from us, they pay us a fee. And if they need to buy any nancial products to execute their plan, we will help them buy these products but we will return 100% of the commissions back to them. Many people said to us that we need not do this. As long as we have honest advisers, we would be able to give honest advice. But our thought was that honest advisers is a given in this work that we do. If you are not honest, you should not even do this work. But, we still need to put in place a structure to minimise temptations and conict of interest. To give the most independent and competent advice, besides have enough breath of nancial products to choose from, we basically breakdown the entire advisory process, to be carried out by different teams of people. Our client adviser from the advisory team, who are client facing provides general nancial planning advice and risk coaching in investments. But they cannot recommend specic products. The specic products are recommended by a team of salary-based specialist who are not client facing. This not only ensure that the most competent people do what they are best at (client advisers perform general nancial planning, risk coaching and relationship management, and specialist in their own expert domain such as insurance, investments etc recommend the specic strategy and products). The investment portfolios are managed by a separate team of investment analysts reporting to a head of investments. This investment team further reports to an investment committee that are staffed by members outside of Providend. We do not believe that advisers who are good at relationship management, general nancial planning can also be an expert in estate, insurance, investments etc. By structuring the process this way, we also ensure independence and minimise conict of interest. While we appreciated the Providend’s advisory model, we realised that most of the clients that came to us were the mass afuent clients whose nancial situations were more complex and they required more in-depth planning. They also had the ability and was willing to pay us a fee. However, we were unable to reach out to the rest of the people whom genuinely need good advice, but were not able or unwilling to pay a fee. In truth, their nancial needs are also a lot simpler, which do not require them to pay a fee for advice. This was when we decided to birth DIYInsurance in June 2014, to bridge this gap. The idea of DIYInsurance was simple. We want to create a transparent platform where people with insurance needs can come to a safe environment, to get advice, without feeling pressured to buy and knowing that
56 Chapter 6
whatever they are getting is best for them, and not because we earn the most from it. We achieve this by: 1. Openly stating that we advocate term insurance and not whole life insurance. By saying that we advocate term insurance, we are not saying that whole life insurance are of no use and we will not recommend it to clients. What we are saying is that for your higher priority needs, you only need term. Once you have taken care of your basic needs, including retirement planning, funding children’s tertiary education, and if you still have budget, you can take care of the lower priority insurance needs and use whole life plans if you want. Today at DIYInsurance, 1 out 4 policies that we recommend are whole life insurance. They are only sold to meet those unique needs that are usually not of top priority, and only after the higher priority needs are met. 2. Putting up an engine to compare the premiums and features of different insurance companies that are on our platform. In this way, clients know which the cost-effective plans that are suitable for them are. 3. Putting up educational materials and planning tools to empower clients to decide what they need and not what advisers want to sell them. And if they need advice, by 4. Using salary-based advisers to advise clients, we minimise conict of interest. On top of that, the advice is backed by nearly 20 years of experience from the founders 5. Ensuring that there is absolutely no pressure selling. On average, clients only need to meet us once, for between 20 minutes to an hour, to apply for their insurance. 6. Letting clients know all the various promotions from the insurance companies, so that clients get the best deal. 7. Having a client service team to help clients with post-sales service such as claims. On top of the above, we give a 30% rebate of salesperson’s commission (for as long as the insurance companies pay us) to reduce the cost of purchasing insurance. But DIYInsurance is not about giving rebates. Our clients really come to us because they feel absolutely safe doing their insurance plans with us. Over the past 2 years, we have received so much encouragements and recognitions from clients. You can read them here. And because we embrace honour in our work, and because the practices we put in place exhibit our value of honouring clients and our staff, Honour Singapore recently produced a short video, in recognition of this. 57 Chapter 6
It has been a long journey for Providend since 2001 and the road hasn’t been easy. In my near 20 years in this industry, I have realised that in order to do the right thing and to always put clients’ interest rst, we must be prepared to make sacrices. One such sacrice is in the form of receiving ak from advisers, for not all of them agree with our stand. But we believe that this sacrice is worth it, because we can answer to ourselves and above all, our clients. This is our calling, our purpose. I salute all Providend and DIYInsurance staff for sharing our dream and walking this journey with us. I thank all our clients for being part of this adventure in making honest advice work.
58 Chapter 6
Epilogue
59 Epilogue
T
his e-book started with Mr. Marq Siew, an adviser with many years of experience in the insurance industry, stating his many points of contention against our stand on term insurance. It is only appropriate that we end the book by answering Marq’s questions/points. Marq Siew’s Points of Contention
1. Marq feels that in advocating term insurance, we are not being customer-oriented but product-oriented. 2. That we are obsessed with arguing which instrument is better. He feels that all products are created to meet a certain need. If DIYInsurance advocates the use of Term insurance against Whole Life plans, we are advocating a one-sized t all approach. We should instead customise each plan to customers’ needs. 3.That regulators have indicated before that they do not wish to see product-type pushing (Term policies are a product-type), by expressing that Incentives should not be given for any particular product-type. As such, by advocating Term insurance, What DIYInsurance is doing is akin to product pushing. 4. That If Term insurance is so good, like what DIYInsurance is saying, there should be a massive landslide of market share to Term plans. But this is currently not the case. Marq is alluding that good products will lead to huge market share or simply put, a huge market share means that the product must be good. 5. That Providend/DIYInsurance is saying that Term insurance commission rates are lower than Whole Life commission rate. And as such, we should publish a table on commission rates to the public. 6. That DIYInsurance is insinuating Singapore nancial planners/consultants/advisers because we allude to them getting lower commission rates for recommending Term policies and so most prefer to recommend Whole Life plans. 7. That DIYInsurance should make a public apology for pt 6. 8. That we assumed that all Singaporeans do NOT require coverage after exactly aged 65 years old.
60 Epilogue
OUR REPLY Dear Marq By now, I hope you have realised that in advocating term, we have never been more customer-centric rather than product-centric. Our decision to make this stand was not done without research, analysis and deliberation. And at the centre of our process is this: Our clients. Inside and outside of our boardroom, we constantly asked ourselves this one question: What is best for our clients? And we are convinced, that after considering all that we have written above, that term insurance is the most suitable insurance for a large majority of people in wanting to protect their higher priority needs. Although our philosophy of insurance is that it is primarily for protection and not for saving or investing, this is not the same as saying we advocate “buying term and investing the rest”. We don’t buy term to invest the rest. We buy term insurance because it is the most affordable way to be fully protected. There are situations where using whole life insurance is appropriate. But those situations are unique or should only be done after taking care of our higher priority nancial planning needs, which include retirement planning and accumulating towards our children’s tertiary education. Many including you have said that we are advocating a one-sized t all approach, and that we should understand the needs of the individual client before prescription. I think you may have misunderstood us and also the term “term insurance". Term insurance is not a product. Term insurance is a class of products that are suitable when our need for coverage is temporary and if we want an affordable way to fully meet our huge coverage needs. At DIYInsurance, we take time to understand every client’s need. This is done at the need analysis stage, which may result in clients wanting different amount of coverage, to cover different risks and for different number of years. But as we have painstakingly explained, these higher priority needs are almost mostly temporary in nature and therefore, term insurance is most suitable and cost effective. As an adviser who has been in the insurance industry for many years, you will also know that different insurers price their term insurance differently for different age range and gender. So once we know the needs of the clients, DIYInsurance will then choose the most appropriate term insurance from different insurers for clients. I think after doing all these, one cannot say that we are using a one-sized t all approach, even worse, call us a product pusher. (Product pushing happens when without understanding the needs of the client, a product is being sold.) 61 Epilogue
Dear Marq, unfortunately, we cannot agree with you that good products will lead to huge market share or simply put, a huge market share means that the product must be good. There are many contributing factors to market share, and the quality of the product is but only one of them. And even if we accept your thesis, you will notice in table 5.1 that over the years, the proportion of sales for whole life plans are decreasing while term plans have been increasing. Does this then suggest that whole life plans are no good and term plans are better? We do not think so. As we have explained in Chapter 5, we believe that this is because consumers and advisers alike are beginning to understand the use of term plans better and also insurers are coming out with good and competitively priced term plans. It is not what the market share was that is important but where it is going. We also think that you have misunderstood that we assumed that all Singaporeans do not require coverage after exactly aged 65 years old. Nowhere in our publications have we said that. In various publications including our earlier articles, we used age 55, 65 and even age 70 as an age for illustrative purposes. But we do maintain our stand that for our higher priority needs, our need for insurance coverage is temporary. One day, whether aged 55, 65 or 70, we do not need insurance coverage anymore. With regard to commission, we would also want to clarify that we have never said that commission rates for selling a whole life plan is better than term plans. We have always said that commissions are higher when whole life plans are sold. This is because, for the same coverage need, the premiums for whole life plans are many times higher than term plans. You have requested us to publish a table of commission rates for whole life and terms plans to the public. Unfortunately, we cannot accede to your request as our agreements with the various insurers do not allow us to do so. However, what we can do is to publish Appendix 1 to 5, where we put up the different premiums and agent’s rst year commission from different companies (keeping names anonymous). We can clearly see that though the commission rates for term and whole life plans do not differ much, selling a whole life plan to meet coverage need of our clients cost the client a lot more, than if he had bought a term plan. Higher premium translate to higher commission. Marq, it was not my intention to insinuate Singapore nancial planners/consultants/advisers. I have stated in a few of my articles and in this book, that there are good advisers who will do the right thing, even if it means earning a lower commission for themselves. I salute all these advisers. However, it is true that the commission structure can cause one to be tempted to sell a product that is of a higher compensation. We need to be honest to accept this as a fact. But I agree with you that in those articles that I wrote in my earlier years, my tone of voice could have been better. Although my principle was right and I don’t apologise for making this stand on
62 Epilogue
term insurance, my posture could have been much better. For that, I sincerely apologise to every single adviser in Singapore which I may have offended. I hope all of you can forgive me. Thank you Marq for reading this book. I hope many advisers and you have enjoyed and beneted from reading this as much as I have enjoyed writing it.
63 Epilogue
Appendix
64 Appendix
Appendix 1: Possible insurance plans for Tony to cover $500,000 death/TPD
Company A Company B Company C Company D Company E
Term Plans (Term till age 70) Premium (p.a.) $2,345 $1,922 $2,310 $2,131 $2,178
Whole Life Hybrid Plans (Premium p.a.) $5,761 $7,410 $5,849 $8,739 Not available
Traditional Whole Life Plans Premium (p.a.) Not Available $15,670 $14,581 Not available $14,320
Table A: Various insurance options for Tony *Not Available: Insurers either do not have the product or do not have products that have the same 25-year limited premium term. **The premium for the whole life and whole life hybrid is over a limited period of 25 years.
Company A Company B Company C Company D Company E
Term Plans
Whole Life Hybrid
$1,351 $748 $845 $852 $1,089
$2,938 $3,335 $2,281 $3,495 Not applicable
Table B: Estimated agent’s rst year’s commission for selling the above policies in table A
65 Appendix
Traditional Whole Life Plans Not applicable $7,052 $5,687 Not applicable $5,728
Appendix 2: Possible insurance plans for Peter to cover $1,000,000 death/TPD
Company A Company B Company C Company D Company E
Term Plans (Term till age 70) Premium (p.a.) $3,203 $2,913 $3,391 $4,622 $3,261
Whole Life Hybrid Plans (Premium p.a.) $11,189 $14,720 $11,253 $17,472 Not Available
Traditional Whole Life Plans Premium (p.a.) Not Available $31,340 $29,162 Not Available $28,640
Table A: Various insurance options for Tony *Not Available: Insurers either do not have the product or do not have products that have the same 25-year limited premium term. **The premium for the whole life and whole life hybrid is over a limited period of 25 years.
Term Plans Company A Company B Company C Company D Company E
$1,845 $1,133 $1,241 $1,849 $1,631
Whole Life Hybrid Plans $5,706 $6,624 $4,388 $6,989 Not applicable
Table B: Estimated agent’s rst year’s commission for selling the above policies in table 5.5
66 Appendix
Traditional Whole Life Plans Not applicable $14,103 $11,373 Not applicable $11,456
Appendix 3: Possible insurance plans for Tony to cover $130,000 for income replacement due to a critical illness and $50,000 for alternative medicine and care Whole Term Plan Life (till ALB with 70) with $130,000 $130,000 Company A Company B Company C Company D Company E
$1,707 $1,699
Not Available Not Available
Whole Life Hybrid with $130,000 Not Available
Whole Life with $50,000 Not Available
$2,843
$2,166
$1,700
$4,884
$2,484
$1,986
Not Available Not Available
Not Available
$2,269
Not Available
$4,650
Not Available
$1,814
Whole Life Hybrid with $50,000 Not Available Not Available Not Available Not Available Not Available
Whole Life with $180,000 Not Available
Whole Life Hybrid with $180,000 Not Available
$8,098
$3,061
$6,763
$3,249
Not Available
$3,143
$6,439
Not Available
Table A: Various options for Tony to cover $130,000 income replacement for critical illness and $50,000 for alternative medicine and care *Not Available: Insurers either do not have the product or do not have products that has limited 25 years premium term **The premium for the whole life and whole life hybrid is over a limited period of 25 years.
Whole Term Plan Life (till ALB with 70) with $130,000 $130,000 Company A Company B Company C Company D Company E
$983 $637 $612
Not Available Not Available $1,905
Not Not applicable Available Not $1,860 applicable
Whole Life Hybrid with $130,000 Not Available $1,279 $969 $907 Not Available
Whole Whole Life Life with Hybrid $50,000 with $50,000 Not Not applicable applicable Not $974 applicable Not $774 applicable Not Not Available applicable Not $726 applicable
Table B: Estimated agent’s rst year’s commission for selling the above policies in table A
67 Appendix
Whole Life with $180,000
Whole Life Hybrid with $180,000 Not Not applicable applicable $3,644
$1,652
$2,637
$1,267
Not applicable
$1,257
$2,575
Not applicable
Appendix 4: Possible insurance plans for Peter to cover $360,000 for income replacement due to a critical illness and $50,000 for alternative medicine and care Whole Term Plan Whole Life (till ALB Life Hybrid 70) with with with $360,000 $360,000 $360,000 Company Not Not $4,364 A Available Available Company Not $3,810 $7,728 B Available Company $4,662 $13,010 $6,242 C Company Not Not $6,293 D Available Available Company Not Not $12,877 E Available Available
Whole Life with $50,000 Not Available $2,166 $1,986 Not Available $1,814
Whole Life Hybrid with $50,000 Not Available Not Available Not Available Not Available Not Available
Whole Whole Life Life Plan Hybrid with Plan with $410,000 $410,000 Not $6,782 Available $17,142
$7,834
$14,817
$7,110
Not Available
$7,167
$14,666
Not Available
Table A: Various options for Peter to cover $360,000 income replacement for critical illness and $50,000 for alternative medicine and care *Not Available: Insurers either do not have the product or do not have products that has limited 25 years premium term ** The premium for the whole life and whole life hybrid is over a l imited period of 25 years.
Whole Term Plan Whole Life (till ALB Life Hybrid 70) with with with $360,000 $360,000 $360,000 Company Not Not $2,514 A Available Available Company Not $1,429 $3,478 B Available Company $1,678 $5,074 $2,434 C Company Not Not $2,517 D applicable Available Company Not Not $5,151 E applicable Available
Whole Whole Life Life with Hybrid $50,000 with $50,000 Not Not applicable applicable Not $974 applicable Not $774 applicable Not Not Available applicable Not $726 applicable
Table B: Estimated agent’s rst year’s commission for selling the above policies in table A
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Whole Whole Life Life Plan Hybrid with Plan with $410,000 $410,000 Not $3,459 applicable $7,714
$3,525
$5,779
$2,773
Not applicable
$2,867
$5,866
Not applicable
Appendix 5 - How much cover you can get from whole life and whole life hybrid plans with the same premium you pay to get term plans Premium for $500,000 term plan till age 70 Company A Company B Company C Company D Company E
$2,345 $1,922 $2,310 $2,131 $2,178
Sum Assured of Whole Life Plan for the same premium of $500,000 Term Not Available $59,000 $71,000 Not Available $73,000
Sum Assured of Whole Life Hybrid Plan for the same premium of $500,000 Term $195,000 $125,000 $186,000 $122,500 Not Available
Table A: How much cover you can get from whole life and whole life hybrid with the same premium to get $500,000 term plan
Company A Company B Company C Company D Company E
Agent’s First Year Commission (Term Plan) $1,351 $748 $845 $852 $1,089
Agent’s First Year Commission (Whole Life Plan) Not applicable $865 $900 Not applicable $871
Agent’s First Year Commission (Whole Life Hybrid Plan) $1,196 $865 $900 $852 Not applicable
Table B: Estimated agent’s rst year’s commission for selling the above policies in table C
Premium for $1,00,000 term plan till age 70 Company A Company B Company C Company D Company E
$3,203 $2,913 $3,391 $4,622 $3,261
Sum Assured of Whole Life Plan for the same premium of $1,000,000 Term Not Available $89,000 $112,000 Not Available $112,000
Sum Assured of Whole Life Hybrid Plan for the same premium of $1,000,000 Term $264,000 $190,000 $274,305 $264,514 $186,000
Table C: How much cover you can get from whole life and whole life hybrid with the same premium to get $1,000,000 term plan *Not Available: Insurers either do not have the product or do not have products that has limited 25 years premium term **The premium for the whole life and whole life hybrid is over a limited period of 25 years.
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Company A Company B Company C Company D Company E
Agent’s First Year Commission (Term Plan) $1,845 $2,267 $1,241 $1,849 $1,631
Agent’s First Year Commission (Whole Life Plan) Not applicable $1,315 $1,323 Not applicable $1,305
Agent’s First Year Commission (Whole Life Hybrid Plan) $1,652 $1,323 $900 $1,849 $1,298
Table D: Estimated agent’s rst year’s commission for selling the above policies in table C
Appendix 6 - Interesting Facebook Threads About Our Stand on Term Insurance Marq Siew
I would like to enquire as a member of the public: (1) Why are AIA's Term rates generally absent? (2) Can DIYinsurance conrm that these 2 tables do not have any error? It seems that AXA has the cheapest Term rates across Almost all age bands. (3) Can DIYinsurance give the public, an explanation of the recent sudden shift, in terms of how old we should be covered for Death Cover? Just in June 2016, your company was still recommending Death cover till the age of 65. In July 2016, you now recommend it till 70 years old. I certainly hope it's not because most insurers now offer Disability protection till 70 years of age, which caused DIYinsurance to shift it's recommendation, which is noticeable despite the slick footwork. Should we pity consumers who believed in DIYinsurance's past recommendation to buy Term till the age of 55, based on what Christopher said in his 2005 article? What about the clueless public who later believed DIYinsurance's recommendation to buy Term till 65, only now to suddenly hear DIYinsurance shift the goal post again to 70 years old? By the time DIYinsurance shifts the recommended Death cover age backwards again, the overall DIYinsurance recommendation will look like a Whole Life coverage. 70 Appendix
The innocent public which followed such recommendation, are stuck with an old Term policy, with a coverage duration which cannot be changed. Of course, there is a possible Magical solution: these hapless Customers can replace their older Term, re-buy a brand new Term Policy at an older age (sometimes cheaper, sometimes more expensive), to t to the new recommended cover till 70. No clawback of Commissions due to Term-to Term Replacement because there is no Cash Value involved, so the company which does this, can earn fresh Commissions all over again! Diyinsurance.com.sg
Dear Marq Siew, thank you for your comments and questions In an earlier thread that you posted on 21 June 2016 (under the June's Singapore Term Life Comparison Table’s post), you have requested for us to also provide Tokio Marine (TM), AIA as well as Great Eastern Life’s (GE) rates, Roy Yong, an agent from GE has also requested the same. We accepted your request to do so. In including TM term plans, you might know as an adviser, that the shortest term we can buy from TM is a term till aged 70. TM does not have term plans that covers till aged 65. That explains why we have changed the coverage age till aged 70. Marq, once again, you might have misunderstood our CEO’s article dated 16th August 2005 which appeared on Today Newspaper. I embed the link here http://www.providend.com/think-twicebefore-you-pay-your-next-insurance-premiums/ . In the article, Mr. Christopher Tan said “To illustrate, if you are 35 years old man and need to provide your family with a monthly income of $3,000 for 20 years in the event of your unfortunate demise, you will need about $600,000 cover. If you intend to retire and have no dependant at age 55…” Mr. Tan did not advocate that one should buy coverage till aged 55. He was simply illustrating how much coverage one needs and the premium cost if he wants coverage till aged 55. In the same vein, by putting up a comparison table that shows term plan coverage till aged 65, we are not advocating that one should only buy a term plan till aged 65, but simply to use a reasonable term for comparison purpose. We appreciate your concern that the public might not know how long they would need coverage. But that is what we as advisers in DIYInsurance are here for, to guide them and provide them with the most honest, independent and competent advice. We also believe that our clients who come to DIYInsurance to get insurance advice are people who are wise, and as such will not misread our articles. We are honestly shocked to hear of the suggested solution that advisers can ask clients to keep 71 Appendix
changing their term plans so as to earn new commissions. We do hope that the suggested solution is not a common practice in the industry. Providend and DIYInsurance is a duciary. We owe our clients a duty of care. Such so called “solutions" not only have never crossed our minds, we have in fact created a structure to minimise any conict of interest. You might be pleased to know that at DIYInsurance, all recommendations are done by a specialised team of licensed advisers that are salaried-based and not compensated by commissions. They do not get anything out from churning. On top of that, there are higher level checks by an executive director of the rm before each insurance application is processed. This is how serious we take our advice to our clients. To top it all, in all of our 13 years of operation as a rm, Providend has zero compliance breaches of such nature. Finally, our comparison table is accurate as at 1 July 2016 and so AXA rates for the specied parameters are accurate. AIA rates are missing for most age band because AIA Secure Term Plus (II) (AIA’s term plan) limit coverage to 5, 10, 20 or 30 years. On another post Tan Songkai
Sounds like a advertisement for AXA though Fyi, cost of insurance to be paid to AXA highest in Singapore. 9% 杜奇成
SongKai - any supporting materials to prove so? Tan Songkai
Meet me in real life. I'll show you :) Diyinsurance.com.sg
Dear Tan Songkai, thank you for your comment. One of the factors that affect premium rates is mortality cost aka as the cost of insurance. The higher the mortality cost, the higher the insurance premium. Our comparison table showed AXA to have the lowest premium for this scenario. Would appreciate if you can elaborate what you mean when you say AXA has the highest cost of insurance, especially so when premium is lowest. Thank you.
72 Appendix
Tan Songkai
As I said, meet me in real life and I'll.show you the evidence :) Tan Songkai
Premiums are shown but rate of deductions are not. Diyinsurance.com.sg
Dear Tan Songkai, thank you for your reply. As much as we believe you might have the evidence, that was not our question. We are just asking what you mean when you say AXA has the highest cost of insurance when premium is the lowest as it is technically unsound. Thank you. Tan Songkai
LOL. are you technically unsound? Premiums are what the client pay. However, every insurance plan has a cost that will be paid to the company. For example, if a client wants a ilp that cost 100$ a month. Will 100$ be actually used for investment? Yes and no. Front end loading, the company deduct 5$ and invest the remaining 95 into the invest ment fund of client choice. Back end loading, 100$ is invest rst. At the end of x years, 5% of the total value is deducted to pay the company. AXA deduct the highest amount to pay the company salary and operation cost. This is what I am saying. Diyinsurance.com.sg
Thank you Tan Songkai for your reply. But amount deducted to pay front end load, back end load, company salary and operating costs are not dened as cost of insurance. They are distribution cost 73 Appendix
and coy expenses. Cost of insurance is mortality rates based on life expectancy. So your denition may be incorrect. Tan Songkai
Lol.sorry but I do.Not memorize denitions. All I know is loading affects how much clients get from company only. And axa has the highest in this aspect. This means although on paper axa win but factoring this aspect axa will lose :) Diyinsurance.com.sg
Dear Tan Songkai, thank you for your reply. We accept your apologies for not knowing the meaning of the term "cost of insurance". But this is a term plan comparison that you are commenting on. There is no return of cash or investment value to clients. 杜奇成
Hence Tan Songkai - sound so condent earlier .... lol but well you learn something new. :) On another thread Marq Siew
With reference to DIYinsurance's reply to Felix Lam, DIYinsurance has valid and invalid points. 1st, Top in the class does not equal to good enough or sufcient. If a child scores 38 marks out of 100, and the rest of the classmates all score lower, the child is Top, but fails the examination. 2nd, the Low cost of the ETF cannot be immediately interpreted to translate into higher returns. If it does, why do the high nett worth individuals not buy just ETFs, but buy investments based on sectors and countries? Because the rich and well educated are not informed of the existence of ETFs? ETFs may give better returns. May in caps. Cheapest may not equate to being the best when it comes to investing. Do any of us even buy the cheapest toothpaste in a supermarket? Do we buy everything we use, based on the cheapest product in a supermarket, regardless of the reliability, benets and ingredients? Of course I still advocate that for plain simple Term coverage, cheaper is always what we are looking for.
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3rd, it is true that buying a Term policy may be better for investment savvy consumers. I seldom see investment savvy consumers who buy Term and invest the rest, buy ETFs. They often invest in other instruments. A Term and ETF mix doesn't seem to be seen often. 4th, if the individuals in a particular society are not nancially educated enough yet, doesn't it make strategic sense to focus on the education part rst, before we push them to do buy Term and invest the rest (because they don't know what they are doing also) now? Can you force a 10 year old child to take a degree in Quantum Physics immediately, skipping all the basics of physics supposed to learnt along the way, just because "eventually you will have to learn it anyway"? There is a time and process for everything. I acknowledge that DIYinsurance has a noble mission, but I suspect that DIYinsurance should focus on investment education, instead of recommending that everyone buy Term insurance immediately. That would be even more noble, but from a business point of view, it may not be what DIYinsurance wants to do. Diyinsurance.com.sg
Dear Marq Siew, thank you for sharing your thoughts. Please allow us to clarify your misunderstanding 1. When we put up the link to show that Singapore is ranked top in nancial literacy in Asia Pacic, we did not say it is good enough, rather, if you have read our post and the article in full, you would realised that we are simply saying that Singapore's nancial literacy level has improved. 2. When we shared with Felix Lam on how we can invest using low cost ETFs, again, if you have read what we commented, we did not say that it is the best, but rather, it was to answer to Felix's point on advisory and trailer fees. We are simply saying that ETFs have no trailer fees and have low advisory fees. We also did not say that lower cost translates to higher returns. We simply said that higher cost (in terms of higher expense ratio) eats into returns. Risk and returns go hand in hand. If one wants a a possible higher return, they have to take more risk. This is how markets work. 3. You mention that high net worth do not just buy ETFs but also invest in sectors and countries. Once again, if you have read our comment, we are not saying one should only buy ETFs, but rather we are simply giving Felix an example of an investment option that is without trailer fees. But really, whether one is high net worth or not, it should not be a stopper to investing into other investment options. You might want to know that you can also invest into sectors and countries using ETFs. ETFs do not restrict 75 Appendix
your geographical exposure. It is basically a way of investing into a basket of securities by tracking the index. They do not do security selection to beat the market. Therein lies the reason why it is low cost. 4. Unfortunately, We have to disagree with your point that buying a Term policy may be better for investment savvy consumers. Once again, we reiterate that buying term is not so that one can invest the rest. Buying term is the most affordable way to be sufciently covered. Whether you are investment savvy or not, there is a need to be sufciently covered. Our point in our reply to Felix is also that if consumers are not investment savvy, it is our job as advisers to help them. 5. We quote your 4th point: "if the individuals in a particular society are not nancially educated enough yet, doesn't it make strategic sense to focus on the education part rst, before we push them to do buy Term and invest the rest (because they don't know what they are doing also) now" - Firstly, we are aligned to your point that we should educate. This is why we have been writing such articles since 2003. However, we do not agree with you that it makes more strategic sense to focus on the education part rst, before we get people to buy term and invest the rest. Once again, if you have read our reply to Felix and the above comment, we are not advocating buying term and investing the rest. Secondly, you seems to suggest that before individuals are nancially educated, they should not buy term. The question is, how do we measure if individuals in a society is ready? As you have alluded in your rst point, that even when we are top in nancial literacy in Asia Pacic, it is not good enough. So the question is: when will our consumers be "good enough" to buy term insurance? When we started out writing in 2003, advisers have said that consumers are not ready. 13 years later, when we posted the same articles that were written more than a decade ago, advisers are still saying that our consumers are not ready. Our belief has always been: consumers will be ready when we as advisers are ready. Thirdly, at Providend and DIYInsurance, beyond being concerned with whether it makes strategic sense for us. We are also concern with doing what make sense for our clients. Beyond a business enterprise, Providend and DIYInsurance are rstly duciaries. 6. We are humbled that you acknowledge that DIYInsurance has a noble mission. We have never seen ourselves that way. We only want to do what is best for our clients. If you have visited our web portal, you will notice that we carry whole life plans as well. From a business point of view, it doesn't make a difference whether clients buy a whole life or Term from us. Marg, you might want to post your reply with Felix's thread so that readers watching this space can follow our points easier. Thank you once again for watching this space and sharing your thoughts. Have a good weekend! 76 Appendix
