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Monday, November 8, 2010

It's taking a long time for term insurance to be promoted

Life insurers know that term insurance is the best and most economical way to ensure protection for you and your family. But they do not encourage their agents to promote it actively because the returns are pittance compared to those that have an investment link.

Over the years, the authorities and a few honest financial advisers have been urging the industry to do the right thing but to date their pleas have fallen on deaf ears.

Last month, Senior Minister Goh Chok Tong raised the subject again by asking life insurers to put more emphasis on term insurance. He gave good reasons why it should be done, one of which was that it would allow lower-income to be insured.

So far, nothing has been heard from the life insurance industry leaders to say that they support SM Goh's call.

Meanwhile, I was encouraged after reading a commentary in The Sunday Times yesterday (Nov 8) by Christopher Tan, CEO of Providend, a fee-only independent financial advisory firm, advocating the use of term insurance as a form of life protection.

I was sufficiently moved by his piece to write a letter to the newspaper calling for action to be taken. Hopefully, it will be published in the next edition.

Here's letter to The Sunday Times....

After reading last Sunday's Invest commentary, “For good terms, buy term insurance”, by Christopher Tan, CEO of Providend, a fee-only independent financial advisory firm, I must say that his is the most honest and clearest of all the views that have been expressed by industry leaders on this subject.

Although there have been other advocates of term insurance as the best and cheapest way to protect yourself and your family, their voices have somewhat been lost in the insurance jungle out there.

This is because insurers have always been able to counter their argument by appealing to people's natural inclinations towards savings and investments, and encouraging them to buy investment-linked products instead.

But what these insurers have failed in their duty by not informing their customers the indecent amount of commissions that they would make from selling such “with-profits” policies. Policy-holders therefore are not made aware of how much they have been over-paying for protection.

But Senior Minister Goh Chok Tong certainly knows what has been going on when he recently urged insurers to put more emphasis on selling term insurance. The Insurance Commissioner from the Monetary Authority of Singapore has also over the years been encouraging the life insurance industry to do the same.

However, my belief is that change will be slow --- if at all. According to CEO Tan, his firm has been advocating term insurance for the past seven years but not very much has changed.

As I see it, there is really no motivation for these insurers to heed what SM Goh said.. Why should they when a large chunk of their profits is from selling investment-linked products. I dread to think how much mis-selling of policies has taken place.

Many who have been landed with “wrong or inappropriate” policies are now stuck with them. They do not know how to extricate themselves from the situation they have been put into without losing lots of money.

While the government is only doing the urging because it still believes in the “buyers beware” regime, the insurers and their agents meanwhile continue to sit pretty on their awesome profits and commissions.

It is high time someone in authority took action to burst the bubble. Words alone mean nothing to Big Business.

Here's Christopher Tan's commentary in The Sunday Times yesterday:

"For good terms, buy term insurance"
Insurance is for protection only – and term policies offer more value for money than whole life plans

"Since 2003, my wealth management firm Providend has been advocating the use of term insurance as a form of life protection. While many Singaporeans appreciated our belief, the insurance and financial planning industry fought it. We stood out like a sore thumb and were a lone voice.

So it was very encouraging for me when, during NTUC Income’s 40th anniversary dinner two weeks ago, Senior Minister Goh Chok Tong supported the use of term insurance and even asked insurers to put more emphasis on it.

So, why our belief in using term insurance?

Some of the biggest risks in life include the loss of income due to death, disability and any medical crisis. When we retire and no longer earn an income, we do not need insurance protection for it. Therefore, buying permanent cover using expensive whole life insurance means paying for something that you do not need and likely cannot afford. So Singaporeans end up being grossly under-covered for their protection needs.

One of the main reasons given by insurance agents to people on why they should not buy term insurance is that when the insurance expires, you will get nothing back. While this is true, it is only half a truth. This is because it is the same for whole life plans too. For every dollar you pay as premium for your whole life plan, a portion of it goes into paying the mortality charge that provides you the cover you need. The rest of it is invested into the insurance company’s life fund. The mortality charge portion is never returned to you.

The only reason you get money back from a whole life plan is that you gave the insurance companies extra money to invest. But when you buy a term plan, you are effectively paying only for the mortality charge. You are just buying pure protection.

For the longest time, we have been told that we can use insurance for protection as well as saving towards our financial goals. The irony of this is that the returns of insurance are insufficient to help us reach our goals and whole life insurance is so expensive that you are likely to have insufficient cover, which means it will not protect you fully as well. So buying whole life insurance achieves neither goal.

When we buy term insurance, we can at least achieve the protection goal, which is the priority and foundation of all good financial plans. Then, with proper advice and coaching, we can use the savings from not buying a whole life plan to invest and reach our goals. We now have a chance to achieve both goals. Even if you are very conservative, there are many other optional instruments. There is no need to use insurance. Insurance is for protection only – the word insurance suggests so.

If the advantages of term plans are so clear, why are they not frequently bought? There are many reasons, but editorial space allows me to highlight only the two main ones. I call them the two ‘lacks’ of salesmen. The first is the lack of knowledge, and the second, the lack of motivation.

When I started out in this profession about 14 years ago, I spent a short time with an insurance company. I can count the number of times we were trained in the use of term insurance on one hand. The emphasis was always on ‘with-profits’ products.

But I think the biggest hindrance to term plans is the salesman’s lack of motivation. It is obvious that the commission payout for a whole life plan is a lot more than that for a term plan. In this commission-hungry industry where salesmen are rewarded for sales more than advice, whole life plans will always be sold. This is not to say there are no good salesmen or advisers out there. Unfortunately, they are in the minority. I know some of them who will insist on recommending term insurance despite earning less. To these people, I salute you. But the fact still remains that for the majority, compensation drives behaviour.

I speak at seminars to thousands of people each year. Every time I ask why they don’t buy term insurance, most will tell me that their agents and advisers will not sell it to them. Even if they do, they will package some whole life plans together with it, on the basis of ‘playing safe’, just in case they need it for their entire life.

About two months ago, I asked an actuary (someone who designs insurance products) who had left an insurance company what he buys for himself. Like many former actuaries I have spoken to, he said he would never buy an investment-linked plan or a whole life plan as it is just too expensive and doesn’t make sense. He has protected his family with term plans. So, if the chef doesn’t eat his own cooking, why should we?

SM Goh pointed out that it is the advisers who wield the greatest influence on the type of plan a person buys. I agree. We have been advocating term insurance for the past seven years and not very much has changed. I believe real change will come when Singaporeans understand what insurance is for and begin to insist on term insurance. Salesmen will then have no choice but to sell it.

It is a shame that clients have to tell this industry the right thing to do. But in the case of term insurance, it is the only way things will change. I look forward to the day when we have an advisory industry and not a sales one."

The writer is the chief executive officer of Providend, a fee-only independent financial advisory firm.

As a parting note, this is what CNBC's financial adviser Suze Orman, who also advocates term insurance, has to say about whole-life policies:

"If your friend advises you to buy a whole-life plan, he is NOT your friend."

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