Life Insurance, Yay or Nay?

MANY of us purchase insurance to cover ourselves for a rainy day. However, most people buy them blindly, not finding out enough about the policy or generally just not knowing what they’re getting in to.

The following are some mistakes to avoid when you’re considering to take up an insurance plan.

Future cash value based on present rates: One of the biggest mistakes people make when buying insurance is thinking that the cash values shown or presented are future values, says Success Concepts Life Planners chief executive officer Joyce Chuah.

“These are in fact present values that may not be sufficient for future consumption, be it for education or retirement. Education and cost of living inflation rates can be as high as 6% to 8% per annum.

“A RM1mil cash value will only be worth, in real terms, approximately RM300,000 in 20 years, assuming the education costs or personal living costs rise 6% per annum,” she says.

Non-disclosure of pre-existing ailments: Honesty is the best policy when applying for an insurance proposal, says licensed financial adviser and syariah financial advisory for Excellentte Consultancy Jeremy Tan.

“The truth in declaring the ailments a person has or had will save the hassle of the claims rejected in later years when death or disability or dreaded diseases occur. This happens when the insurer discovers it has not been declared earlier.”

Mistaking the plan for something it’s not: Confusing insurance as an investment tool rather than something for protection against unexpected events like death, disability or disease is another common mistake people make, says Chuah.

“We should just aim to have the highest coverage at the lowest premiums. Instead, invest the difference in a separate investment portfolio meant for your personal goals.

“Returns may not be that great from an insurance plan even if it is an investment-linked plan, as some parts of your premiums go towards the cost of insurance and is not 100% invested.”

She adds that many people think it is safer to invest in an insurance plan because of the word “guaranteed cashflows” or “guaranteed portions,” not knowing that what is guaranteed are usually risk-free rates – namely, what you would get from normal deposits.

“They are probably not aware that not everything is guaranteed and the cash values are just projections into the future at estimated returns on investments.

Purchasing policies too late: Tan points out that a lot of people purchase policies only in later years and when their health conditions have deteriorated.

“The costs of insurance and premiums to be paid will be higher than buying when you are at a younger age.

“In later years, due to certain health conditions, one may not be able to obtain full coverage, namely with the exclusion and/or loading on top of normal premiums.”

Unable to understand insurance terminology: When this happens, a person may not be able to verify if the proposal presented is suitable or not, says Chuah.

“There are just too many different technical terminologies which can be confusing to the lay person.”

She says that in most cases, people just let the agent propose and accept premiums as they are presented.

“Sometimes the agents offer riders which are not necessary or may even intentionally increase premiums by topping up more premiums into investments (if it is an investment-linked plan).

“I am not saying such methods are bad, but if the person’s cash flow is limited, it may be better to have higher coverage at a lower premium by removing some unnecessary riders and/or additional investments.”

Not purchasing an insurance policy: This, in itself, is a big mistake, says Tan.

“When life risks occur, we will need to draw on and even deplete our savings which may be needed for other living expenses.

“This is more critical in phases of life when we have dependents and in later years when we are economically not viable anymore,” he says.

There are no such thing as guarantees: “Guaranteed saving plans do not really guarantee much hedging against inflationary risks,” says Chuah.

“Imagine almost an instant 10% guaranteed return on the sum assured within the first year. Think again. How is that possible and where do they get the 10% return in just a short time?

“Work out the internal rate of return which takes into account time value of money paid (which is earlier) and money distributed (which comes later). Are you giving up your purchasing power for something which you may not need?” she asks.

Source : Business News 

Saturday, 12 July 2014
By: EUGENE MAHALINGAM