Why Whole-Life Insurance Is Like Picking Your Nose

There are some things that I would never pay someone to do for me. Like brushing my teeth. Or reading. Or organizing my iTunes library. Or picking my nose. Even if there was someone offering  these services on Craigslist, I wouldn’t pay him a dime because 1) he’s probably expensive as hell and 2) he would probably do a shitty job. Like I have serious doubts that a Professional Nose Picker would be able to offer as much nose picking satisfaction than what I would have been able to do myself.

Now think of an insurance company as a dentist offering additional professional nose picking services on the side. I’d pay him to protect my teeth – that’s his job. But hell to the no on the nose-picking services. He’d be expensive, and I could totally do it way better if I did it myself.

Whole-life insurance plans (also commonly known as “investment-linked plans”) is kind of like a professional nose-picking service. My insurance company’s job is to protect my family against the risk of a huge anvil plastered with the words “ACME” falling on my head. But it has no business poking its head in my investments, which should be growing as time goes by so that I can buy my own badass anvil protection.

But the sad fact is, most insurance agents are incentivized to sell you whole-life investment-linked plans, or a similarly pricy product. The result? Most Singaporeans blindly listen to them, because we assume that they’re “professionals”.

But the professionals may not always have your best interests at heart (Think of all the doctors who prescribe unnecessary -and costly- treatments because it helps to line their pockets, but that’s another rant I have altogether). There’s a better way to do this: Buy Term and Invest the Rest (or BTITR for short, because Singaporeans love acronyms).

So why BTITR?

1. It’s simple

Term insurance is the simplest form of insurance that exists. You pay monthly/annual premiums for a period of time, and if you die/get injured/get killed by Loki’s Chitauri army before the Avengers save you, your insurance company pays you a helluva lot of money. It’s simple – you’re not mixing your savings, or investments, or speculation, or livelihood, into your protection needs. Contrast this with whole-life insurance, where you have to worry about where you’re gonna invest your premiums, how your funds are doing, and argue with your agent on the administrative fees. Way too complicated.

2. It’s cheap

The premiums for term insurance are often around 10x less than those for whole-life insurance. You’re paying for the simplest protection needs – so there really isn’t much administration that needs to go into servicing your plan, which translates into a cheaper premium.

Tan Kin Lian (presidential candidate that got an embarrassing number of votes at the last Singapore presidential election, but gives really good financial advice on his blog nonetheless) estimates that you would pay only $10,800 over 30 years for term insurance, compared to $180,000 over 30 years for a whole life insurance plan with the same coverage. This table also compares how much cheaper your premiums will be for term vs whole life.

3. You get way better returns by investing on your own

This is my favorite part. Instead of spending a bomb on whole life insurance, buy term insurance instead, take the amount you saved and invest it in a low-cost index fund.

Using conservative assumptions, Tan Kin Lian shows pretty decisively that you would end up with more money by investing on your own instead of relying on an insurance company to invest on your behalf. To give you an idea of the figures, you’d end up with around $390,000 if you’d invested on your own after 30 years, vs approximately $270,000 if you’d relied on the insurance company to invest for you. And the difference is even greater if you extend the coverage period.

Why the difference? The key is that 15-20% of your premiums go into administrative fees and commissions for servicing your account in a whole-life insurance plan. And for the remaining 80% that does get invested into unit trusts (or mutual funds, as they call ’em in the US), you’re charged an annual “management fee” of 1-2% of your funds. After all of these fees, your whole-life insurance plan should return approximately 2.5% per annum, if you’re lucky. Contrast this to the return of an index fund like the STI ETF, which should return at least 5% per annum even if you’re conservative. The difference between 2.5% and 5% may seem puny, but extend that outperformance to 30 years and that translates into a whopping $120 grand.

So don’t be a pansy. Buy term and invest the rest, and have fun picking your own nose.

Being A Sucker for Starbucks (and Insurance)

So I have this friend who only drinks Starbucks coffee. And I’m not talking about cuppacinos, or lattes, or espressos, or the other fancy-schmancy drinks Starbucks is famous for. I’m talking about plain, regular joe, the kind that doesn’t really take any effort to brew. My friend buys a tall “café Americano” every day on his way to work, and pays $4 to drink it out of a sexy Starbucks cup, with a cute little coffee cup sleeve, for a beverage that doesn’t materially taste any different from the home-style brew you’d get at your local coffee shop. Even Starbucks concedes on its website:

“While the Americano is similar in strength and taste to American-style brewed coffee, there are subtle differences achieved by pulling a fresh shot of espresso for the beverage base. The best way to discover these nuances, of course, is to try a cup yourself.” 

Translation: Starbucks can’t tell you what the difference is either.

In terms of taste and how well it keeps me awake, I’ll contend that the 50 cent cup of coffee from my office canteen offers just as much satisfaction as a $4 cup of Americano. Just ask my cubicle neighbors, who have to put up with my moans of satisfaction and I slurp my morning cuppa.

Paying more for something doesn’t necessarily mean that it’s better.

We talked a little bit about insurance and why it rocks, but the type of insurance you get matters too – something I learnt the hard way.

6 years ago, my insurance agent scammer financial planner sold me an investment-linked plan that cost me $100 a month for a coverage of $100K. Back then, it seemed like a good idea – I’d be able to invest in a sexy commodity fund, get coverage from death and disabilities and other Scary Things In Life, and when my units appreciated in value, I’d be able to cash out and buy a diving pool filled with crisp bank notes, bitches!!! Or so I thought.

A couple of years ago, I decided to pull back the hood on these ILPs (Investment Linked Plans) – Checking through the prospectus (something I should’ve done before I signed it, but I was 21 years old and clueless) I realized that a huge portion of the premiums paid – around 15% – went straight into paying off my agent’s administrative fees and commissions. On top of that, the funds I was invested in charged a management fee of around 1.5%, absolutely huge when you compare them to the management fees of passive index funds – around 0.1-0.5%.  After all the fees and charges, ILPs average a measly return of around 2.5% per annum, which isn’t even enough to beat inflation. Goodbye, superdamnawesome bank note-filled diving pool!

I didn’t know it back then, but I could’ve bought another type of insurance and increased my coverage while paying a lower premium. I could’ve then taken the difference and invested it in a low-cost index fund, and after 30 years would’ve been able to afford that diving pool I was talking about earlier.  Whtheck?! Yes indeed – it’s called term insurance, and I’ve officially joined the camp of “buy term and invest the rest”. But more on that later.

The thing is, most insurance agents scammers financial planners will probably try to push the more expensive, frills-laden product on you, simply because of the way their incentives are structured. Agents are paid commissions from whatever they sell you, and it’s a pretty good assumption that the higher your premiums, the more you pay out in commissions. So they’re incentivized to sell you the most expensive plan you can afford, not because it’s the best for you, but because they’re saving up for their own damn diving pool.

So just because your brother-in-law is trying to sell you that sexy investment-linked plan with the high premiums, doesn’t mean that he’s got your best interests at heart. I’d recommend treating all insurance agents like how you would treat financial sleazeballs: do your research, question everything and take all the time in the world to decide. If you live in Singapore, there are plenty of choices for you to choose from – don’t be afraid to shop around. This decision is potentially worth tens of thousands of dollars, so it’s worth taking it slow.

Don’t get me wrong. I’m not hating on all investment-linked life insurance plans. They can be suitable for certain types of people, such as older people who have to pay much higher premiums for term plans. But if you’re young and healthy and sexy like me, I really don’t see any reason why you would fork out more money for a shitty investment. It just doesn’t make any sense.

I’ll be blogging a little bit more about term insurance and why it beats life insurance hands down for young people. In the meantime, how many of you have insurance plans that you’re less than happy with? Do you think we should change the whole structure of incentives for insurance agents? Let me know 🙂

Death of A PC (And Why Insurance Rocks)

So yesterday, my work computer died. Like completely, irrevocably died. I tried to resurrect its poor heart by pushing “Please wake up” in Morse code on the power button, but to no avail. The damn machine remained as lively as a librarian’s toenails. It was 9.04am. May it rest it peace.

“DAMN YOU, TECHNOLOGY!!” I yelled, as lighting flashed across the sky. Okay, I exaggerate, but I was pretty damn frustrated. I really, really, really needed my computer to work this week because I’m moving departments (yay!) and needed to teach a colleague how to do my old job. If I didn’t, he wouldn’t be able to do his job well and I would just ruin things for everyone.

And so I was pretty frustrated, partly because things like computer crashes were never supposed to happen to me. They happen to people who watch porn in the office, or download music into their work computer, or don’t click the “eject” button before removing their flash drives. I didn’t do any of those things – I treated my work computer like a baby, but the damn thing still crashed on me! (If my employers are reading this: Obviously, I’ve been working way too hard. Time for a salary review?)

But after crying over the remains of my poor computer, something struck me that totally made my day – Last Friday, my colleague decided that it was a good idea to save a copy of my files onto his flash drive so that he could go through them over the weekend. The flash drive was booted onto a spare desktop, files were copied, and lo and behold, I was up and running again. THANK YOU, USB!!!!

So this incident got me thinking – you never really know what the hell is going to happen to you, do you? You could run virus scans regularly and still crash your computer. You could sweat it out on the running track 3 times a week and still die from a heart attack. You could drive slower than a granny on a tricycle, and still get hit by a speeding maniac taxi driver (which is like, all of em). Life is unpredictable as hell, and no matter how careful you are, or how much preparation you make, there will be something that you didn’t anticipate, and Murphy’s Law states that that is the exact thing that will happen.

I’m not an insurance agent (or a ‘financial planner’ as they call themselves these days – gawd, what a misnomer), but I was talking about insurance with a friend over drinks some time last year. She felt that insurance was something that was probably good to have, and something that she should look into, but it’s like preparing for one of those far-off possibilities that you could get cancer, or crippled, or die. It just seems like almost an impossibility when you’re 27. Yeah, I know, I feel that way too.

But I’ve also read the work of Nassim Nicholas Taleb, who talks about his theory of “black swans”. (No, I’m not talking about the Natalie Portman movie here, though that was awesome). His contention: just because you’ve seen white swans all your life, doesn’t mean that you can conclude that black swans don’t exist. Because all it takes is for you to see just one black swan, and that causes your whole theory to come crashing down. And the nature of “black swans” (the fashionable term for “low probability, high impact events”) is that they can sometimes cause some serious damage.

So just because it’s never happened before, or just because you think you’ve taken all precautions, doesn’t mean that you are completely safe. Smart, savvy and financially independent people know that anything can happen that could destroy your savings in an instant: the death of a breadwinner, a hospitalization of a loved one, or your house burning down. So they take steps to mitigate that risk by getting insurance. To be honest, you may never actually use it, so lots of people see it as throwing money away. But I’d rather shell out a little bit of money every month, to be able to sleep soundly knowing that I’m insured against the risk of wiping out my savings and investments that I’ve worked so hard to build up!

Note: I think insurance is important, but don’t get me wrong here – I’m not saying that you should run out and buy like a ridiculously expensive plan and pay $20K a month in premiums. In fact, I think the insurance industry is structured in a way that incentivizes agents to sell certain plans that may not be in the best interest of the insured – More on that later! I’ll also blog about the types plans that are the most cost-effective, while providing the protection you need. Stay tuned 🙂