Students and young people should avoid saving in life insurance policies

I told this story a few months ago, and wish to repeat it.

A polytechnic students told me that he received a monthly allowance of $600 from this father, who is a bus driver. His friend sold him two life insurance policies that takes away $300 a month in premium. He knows realize that it was a bad decision, as he needed the money for his schooling and other expenses, and finds it difficult to pay the monthly premium. If he gives up the policies, he would suffer a large loss in the premiums that he had paid. He is now in a dilemma.

I like to advice young people to avoid taking life insurance policies, as a large part of the premium during the first few year goes to pay the commission to the agent. If you stop the policy, you will lose more than half of the premiums that you have saved. You will need the savings for other unexpected events.

My same advice goes to young people starting work for the first time. The insurance agent will sell you a life policy or investment-linked policy. They are all the same. You will get a poor return and a large part of your premium goes to pay commission to the agent.

Many people save in a life insurance policy (and be tied up for 20 years for a miserable 2% return), and roll over their credit cards paying 24% per year. This is bad financial management.

It is important for you to save, but you should save in a bank account. If you need to withdraw your savings, you do not have to suffer a penalty. If you wish to invest, do it at a later date, and invest in an exchange traded fund (such as the STI ETF) which has low transaction charges and gives you a good long term return.

But, before you invest, you can read my book "Practical Guide to Financial Planning", which will be available  in March 2010, or join the Financial Services Consumer Association, FISCA (www.fisca.sg)

Tan Kin Lian