Two fun things happened last week for me.
1) The National Day Rally speech, which brings on a ton of Financial Journalism and a subsequent ton of questions from clients...
2) ...And of course, this.
Many people, especially practitioners - have given their critical opinion of several things wrong about this.
1) That Moneysense, with the government, shouldn't willingly position themselves against the industry that they are working with.
2) The language choice was pretty awful. Dehumanizing at worst.
On my end, I was a little put off at the language choice, but to be honest I was more appalled at the infographic itself.
You see - I'm a pretty critical person, and as a result I'm quite prone to getting criticized myself. So you typically avoid this by being right about things, so that there is less to criticize.
Infographics are good for basic understanding, but a financial product is a lifelong commitment. It requires a good advisor, and it requires serious details.
Here are some lack of details from this infographic - that if left out could cost you a serious ton of money.
MYTH : Premiums Stay Constant Until Renewal
REALITY: Premiums of Plans May NOT Stay Constant Per Year.
Imagine you've paying for your Term policy - it's a private, customized plan of $1000,000 that you're paying a low cost of $1000 per year or less for, and you're highly satisfied with yourself.
6 months before your next yearly premium is due, you get a letter that says that your price went up to $1200 and whether you accept this.
For a Term policy, which isn't a Hospital plan? What?
Not only do you have no clue how that happened, but you now have to figure out how not to be uninsurable.
Let's look at the potential culprit.
The premium rates for your Critical Illness Riders, or even your policy itself, are not guaranteed.
This is something that many people will miss, because you have to consider the policy contract. There are two things you need to have to ensure your insurance costs are always the same -
a) Premiums are Level - This basically tells you that the price quoted to you is calculated on the assumption that you pay until the completion of the policy.
As a result, this allows the insurer to quote you a more favorable price, since you'll technically be more committed upfront and they can use the larger premium to generate more profit.
A Level Term Policy could look like this:
Age
40 - 45: $2000
46 - 50: $2000
51 - 55: $2000
56 - 60: $2000
While a Renewable Term Insurance could look like this:
Age
40 - 45: $1500
46 - 50: $1900
51 - 55: $2300
56 - 60: $2700
b) Premiums are Guaranteed - From that point, you want the policy to say 'Guaranteed' because Singaporeans like Guaranteed.
Guaranteed basically means that your prices aren't affected by things that could affect your policy premium - such as:
i) High Claims Rates
ii) Unforeseen Expense Ratios, such as high cost of operations
iii) Medical Inflation
You get it. Without that 'guaranteed' word, your policy price is still subject to future change.
Some good news - first of all, this applies to very few older policies and primarily Critical Illness Riders, as you can see in the illustration above.
For Life Insurance, prices rarely fluctuate - in fact, they can get even cheaper and competitive, so guaranteed is typically not an issue for insurers.
The second and more important thing, is that this kind of scenario is very rare, almost unheard of. Most plans are priced with extreme precaution.
That being said, it's good to be mentally prepared for this unlikely event, and it's misleading to suggest that it is a guaranteed constant.
MYTH: Whole Life Insurance is a Fixed Premium for the Duration of the Policy
REALITY: You Can Pay Off a Whole Life Plan Much Sooner
Earlier inceptions of 'Whole Life Insurance' plans typically required you to pay every year for the rest of your life.
Aside from the consideration above, paying for your whole life plan doesn't have to be every year until you're dead anymore.
That was quite exhausting for our parents - and most of you who might be taking over those policies or already have done so know what I'm talking about.
You can find almost term ranges from 30, 25, 20, 15, 10, 5...or even paid off in a single year.
Failure to understand this, as unlikely as it could be - can result in very drastic costs. Take a look at the exact same benefits and Sum Assured for a 27 year old female for $150,000 with ECI.
20 year payment plan: 2083.30 x 20 = $41,666
Till 99 payment plan: $1457.92 x 72 = $104,970
That's a $63,000 cost over time, if you lived till 99 and your premium was fixed for the duration of the policy.
It doesn't make a lot of financial sense.
MYTH: A Whole Life Policy Covers You For Life.
REALITY: The Definition of 'Life' is Subject to the Contract
Our assumption for life tends to be until we're dead.
That's kind of how we interpret CPF being paid out for life as well.
Some people who are on the older scheme might have been unpleasantly surprised if they had assumed that it would be a lifetime policy as well.
This is not a criticism of CPF at all, but just to be specific when we throw around financial terms online - 'Life' is completely dependent on the contract.
Most life policies currently are till Age 99 and they do not continue beyond that point, which should be something you may want to account for in your planning - whether it's an insurance policy or a 'life'long annuity.
There are exceptions, which define 'life' as higher than 99 - or even lower, if its an especially old policy.
MYTH: Most Major Debilitating Conditions are covered with a Term Life/Whole Life policy
REALITY: ...Or Not.
Major Debilitating Conditions are a bit vague, but I'm going to give some benefit of the doubt and assume we are referencing Total and Permanent Disability only.
But even then, many policies, Term and Whole Life alike - are offering them separate with Riders.
It's a little nit-picky, I'll admit - but I've seen beginner planners who really want to give the client what they want follow very specific instructions.
So the client could assume that Total and Permanent Disability Coverage comes with Life Insurance, but a junior consultant would just not include that coverage, and god knows what could happen a few years down the road.
Again - this isn't a critique of anyone - client or consultant alike, but this can happen and has happened. It's dangerous for everyone involved to work on assumptions.
That's why you want to have the rudimentary knowledge here so that both you and your consultant can be as detailed as needed to get you exactly what you want - nothing more, nothing less.
Conclusion
I could go on, but well - I won't.
Frankly, it's all tip of the iceberg, skimming the surface stuff when you're crafting a personalized portfolio for clients.
Not every client wants to be blasted with that much detail, but consultants are more likely to have said detail when needed.
And based on how horribly some of the assumptions above can go wrong, it's needed.
Honestly, if MoneySense can be corrected, there's not much hope for the rest of us. But at least that's why it was taken down.
There's a reason why blogs, forums or otherwise always disclaim that you should speak to your Financial Consultant for formal advice.
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Money Maverick
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Sources:
1) Various Policy Documents/Fine Print
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