Imagine this: You're rummaging using your kitchen drawer, and recognise that you're from plasters. You know, the sticky thing you put onto your knee whenever you cut yourself against the table (speaking from experience here).
So you visit NTUC to check out plasters. Now, if you're much like me, you probably hate running errands – especially something as mundane as buying plasters.
You arrive at the plaster section, only to be faced with a gazillion varieties. Who has time to compare the intricacies of each type? You want to grab your plasters, check them back your to-do list, and return to watching Daredevil. (Just started watching it on Netflix. Goodbye, productivity!)
Who has here we are at plasters?
Making Sucky Situations Less Sucky
Insurance is like a plaster. I know it sounds weird, but stick with me here:
- Its sole purpose would be to create a sucky situation less sucky
- You only need it temporarily
- You we do hope you never need to use it
For a plaster, it makes your wound much less painful (and when you receive those with the cool animal prints, it makes for any great conversation-starter). After a few days, you tear them back – you don't need it anymore.
For insurance, its smart off when some crappy thing occurs, like when a piano drops you and you die. It can make life less sucky for the family, because they get lots of cash to pay off your mortgage, send your kids to school, etc.
But you do not need it FOREVER – sooner or later, when you're say, Fifty years old, your mortgage is going to be paid off, your kids might have started working, and you will have a pleasant stash of savings. At that point, you don't need insurance anymore – you're essentially “self-insured” since you have sufficient to pass through onto all your family members.
For both plasters and insurance, their sole purpose is coverage. You we do hope you never need to use them, but it's nice to understand they are there.
Therefore, with regards to buying insurance (or plasters), you should be asking yourself: Which is the one which gives me the very best coverage, at the lowest possible price?
Here Comes The Value Pack!
Now, let's return to NTUC, specifically the NTUC boardroom where all of the smart NTUC executives meet each week. The chairman asks, “How are we able to make more money for NTUC?”
Some Smart Alec raises his hand: “From our research, people who buy plasters have a tendency to are interested Milo too. Heyyyyyyyyy – we will produce a value pack that bundles both plasters and Milo together? Then we may charge a looooot of money for this.”
*In case it wasn't clear already, this is a HYPOTHETICAL example. NTUC isn't that lame.
I know, it's totally insane. What is do plasters relate to Milo?
The thing is, it really works. Especially on lazy people much like me. I understand that 1) I need to buy plasters, 2) I need to buy Milo. So I'll just buy the value pack that has both! Duuuh.
But I might not realise that I'm also paying a loooooot more for that value pack rather than buying the items individually.
So whenever we apply this to everything about insurance,
- Term insurance is like a plaster: There are just one purpose – To give you coverage
- Whole-life insurance is like the value pack: It bundles together plasters (coverage) and Milo (investments)
The latter is fantastic for lazy millennials. We have seen insurance and investments as things to check removed from our to-do lists. We all know we gotta purchase them at some point, but man are they boring to research!
So whenever a financial arrives and tells us that people might have BOTH packaged up right into a single product, we're super happy. We gladly remove our wallets and pay for it.
But let's say I said:
- That you had been actually overpaying – sometimes by 1000s of dollars each year – for the same coverage?
- That you might have used the cash held on to earn a much better return?
- That your financial planner was getting thousands of dollars in commissions, using your money to fund his new Audi? (Check out the Appendices within this excerpt – fascinating read if you're a weirdo like me)
Would that convince you?
Personal finance bloggers have been advocating term plans over whole-life and investment-linked plans for several years now. For instance, take a look at articles from BigFatPurse, Dollars And Sense,Tree of Prosperity, and yours truly.
It's not a secret that I'm a big fan of term insurance. It's just like a nice, solid plaster: It's cheap, it will ONE thing (produce coverage), also it does it well.
The Plaster Retailers
It's a generalised statement, but I get the sense that financial planners like to promote insurance “value packs”, even whether it may not be the very best fit for the clients' needs. I am not saying that ALL financial planners do this; just that the system incentivises that kind of behaviour.
So I had been pleased whenever a young upstart named DIYInsurance jumped on the scene in 2020, attempting to bring term insurance towards the masses. They desired to “create a transparent platform where individuals with insurance needs may come to some safe environment, to get advice, without feeling pressured to buy and understanding that whatever they are becoming is the best for them, and never because (DIYInsurance) earns the best from it.”
They started publishing content on term insurance. Naturally, this really pissed off the financial planners out there. Personal finance bloggers were something, but to possess one of the own dissing their favourite product?
For example, take a look at their comments on DIYInsurance's Facebook page:
Rawr! Them fangs are coming out.
At first glance, these comments seem to make sense. Shouldn't insurance be customised to suit clients' needs? Shouldn't we avoid a one-size-fits-all approach?
Read Also: http://dollarsandsense.sg/4-major-misconceptions-singaporeans-have-about-their-critical-illness-insurance-plan/
We're More Similar Than We Think
But should you dig just a little deeper, you'll realise how hollow this argument is. It's like criticising Apple for only promoting the iPhone, because it's not “customised” to each unique individual's needs.
Yes, we're all unique individuals. Quite a few us have surprisingly similar needs:
- We all want to make sucky situations less sucky (to live in, as well as for our loved ones)
- We have the ability to limited budgets
- Most of us just have insurance up to and including certain point – not forever
For the objective of insuring ourselves in the big event of death and TPD (total permanent disability), I believe that term insurance meets the above needs for that vast majority of people. The customisation comes in whenever you tweak the parameters, for example the provider, the coverage period, the sum assured, etc.
In reaction to the (surprisingly entertaining) conversations on their Facebook page, DIYInsurance came up with an all natural consumer guide: The Case of Term vs Whole Life Insurance.
Read it – it's surprisingly clear and insightful. It is the ebook I wish I had 10 years ago, when I stupidly bought a whole life policy and subsequently terminated it, costing me thousands of dollars.
Yes, it's written by a company that sells term insurance, and yes, the guide advocates their cause. But I'll challenge you to find a convincing opposing viewpoint that applies to most people. You will be hard-pressed to locate one.
In short, with regards to insurance – many people are the best if they save their money and go for the plasters. The “value pack” just ain't worth it.
And if you have had enough of my warped supermarket analogies, check out DIYInsurance's guide.Here's the link again.
P.S: I'm not stating that whole-life insurance coverage is irrevocably bad. In some instances – e.g. if you have kids with special needs and wish to offer them long after your death – it might seem sensible. But the argument here is that for most people, term insurance would meet their needs far better AND save them money.
Full disclosure: This is really a sponsored post from DIYInsurance, and I obtained a term plan from them more than a year ago as a normal customer. However, this doesn't change my opinion – I've bee advocating term insurance since 2012, way before DIYInsurance was formed. Ultimately, I only write articles on topics/companies that I support – and this is one of them.
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