Why only term insurance plans make sense now

Published in the Straits Times Forum page
MR GIDEON Lee ('Buyers, not agents, decide the products they want'; last Friday) asked why I am advocating term insurance when the insurance cooperative that I headed had been selling whole-life and investment-linked policies for 30 years.

During my time, the whole-life and endowment policies were sold with distribution costs that were much lower than comparable products in the market. The effect of deduction was about 20 per cent over 25 years, compared to the 40 per cent for most policies today.

In the past, the cooperative also distributed high rates of bonuses out of the surplus, giving a high yield to policyholders on these old policies.

The letter writer quotes the example of a term insurance premium that charges $200 a month. This is an exaggeration. A young person can buy $300,000 in sum assured under the Singapore Armed Forces (SAF) group insurance scheme and pay only $38.40 a month. This is available to SAF soldiers and operationally ready national servicemen, and their spouses.  To buy this amount of protection under a whole-life or unit-linked policy, the consumer usually has to pay a premium that is 10 to 20 times higher.

Some dishonest agents deliberately quote a higher cost for term insurance to persuade the consumer to buy the alternative policy that charges a higher premium and pays a fatter commission.

Mr Lee said correctly that the distribution cost is not paid entirely as commission to the agent. Part of it is paid to the agent's manager and spent on lavish overseas trips and other sales incentives. Regardless of how the money is spent, the consumer does have to pay the total distribution cost.

The writer said the commission is given for selling the product and not for advice. If this is the case, why are these people called financial advisers, consultants or other impressive names and not life insurance salesmen?

The writer is wrong in saying that I am advocating a one-size-fits-all solution. My aim is to educate consumers
to invest their savings in a low-cost investment fund, rather than a life insurance policy, to earn a better long-term yield and achieve greater flexibility. 

Tan Kin Lian
http://www.straitstimes.com/STForum/Story/STIStory_603264.html

My guidance on how to invest savings in a low cost investment fund, and why this is more flexible to meet the changing needs of consumers is explained in my book, Practical Guide on Financial Planning, available here.