While the bulk of my clientele are Indians, locals and foreigner, I do have a sizeable number of Chinese & Malay clients as well. What never fails to amaze me is the different financial priorities that the different races have. There is a stark difference in their approach towards insurance and financial planning as a whole but there is an insurance mistake that Indians tend to make that the other races do not.
Insurance Mistake: Expecting Returns For Every Dollar
Local Indian clients of mine tend to prefer Endowment and Traditional Whole Life insurance plans, which are policies that give a return on investment projected between 3.25% to 4.75% upon surrender or maturity. In a nutshell, these plans provide money back even if you surrender. This entire myopic concept of expecting returns for every dollar you put in is a very dangerous concept and a mistake when it comes to buying insurance, and it is very prevalent even today among highly educated and well earning local indian clients. This insurance mistake fails to grasp the basic aim of insurance, which is to provide coverage for yourself in the event something untoward happens, such as death, accidental death, total permanent disability, terminal illness or critical illness. Imagine you are a 35 year old person earning $100,000 per year, including bonuses. In my personal opinion, you should plan for an income replacement of at least 5 times your yearly income. In the event of a disability, and you live till 65 with it, your lost income would come up to $100K*30 years= $3M. In the event you pass away, you need a sufficiently high pay out to cater for your dependents. That is why a coverage of at least $500K in this case. A lot of my local Indian clients like to reduce this shortfall by purchasing Endowments and Whole Life plans which cost A LOT because the Sum Assured is $500K. The cheaper, and better, solution is to buy a term plan. What is a term plan? A term plan is a simple policy which is non-participating, basically it has No returns if nothing bad happens. Basically if you are unlucky and if you get hit with a critical illness, accidental death, total permanent disability, or a terminal illness, you will get the sum assured. There are a lot of companies in Singapore offering jumbo term plans, where a 30-yr old non-smoker female can get a $500k coverage for death, total permanent disability and terminal illness. The cost? Just $300 a year for a period of 10 yrs. Imagine if this person suddenly suffered a calamity within 9 years of taking the policy. She would have paid $2,700 while the insurance company is liable to pay her or her dependents $500,000. Let that sink in for a moment. It is a no-brainer that a term policy is a much better value-for-money proposal. If you increase the tenure for the term plan, obviously your premium would be higher. However, the drawbacks of term plans is that there is no surrender value, meaning that if you can’t afford to pay, the whole policy lapses and you lose the coverage. Also, if you survive the period for which you take the term plan, the money you pay to the insurance company is pure profit to them, i.e. there is no return on investment for you if you remain healthy within your term plan period. Despite these perceived drawbacks, I still feel it is extremely important for you to purchase a term plan for your insurance portfolio that covers death, accidental death, critical illness and total permanent disability. The coverage offered for the premium paid make it a worthwhile acquisition, so do yourself and your family a favour and don’t make the same insurance mistake that a lot of Indians tend to make. If you need an insurance review and do not have an agent, feel free to get in touch with me via email. If you have an existing agent, call him/her down for a review and ask them to explain term plans to you. Watch this space below for Part 2 of typical Insurance mistakes made by local and foreign Indians. Or read our previous article on Your Most Important Insurance Policy to buy.