Cost of insurance

Singapore has low mortality rate (death rate) among young people. The rate for most working people below 50 years is less than 0.5 per 1,000. At this death rate, the cost of insurance to provide $300,000 should be less than $300 (after allowing for expenses and profit of the insurance company). You can get this type of coverage at this low rate from group insurance scheme offered to memebrs of SAF, SAFRA, trade unions and public officers.

Many people, however, are now paying 10 to 20 times of this premium to get a similar coverage. The only reason for paying so much is that the part of the premium is being invested to get a return. If this is the argument, then it is important that the yield on the premium that is invested should be attractive, compared to other types of investments. But this is not the case, as most life insurance policies give a return of less than 2% per annum over a long period. A fair return should be 4%, but this is being taken away from the high expenses of the insurance company.

The advice given by many insurance agents are not helpful. On the one hand, they argue that the life insurance policy gives a return on the premium, and argue against term insurance (which does not provide any return). But, when they are confronted with the fact that the return is too low, they changed their tune to argue about the importance of having insurance cover to protect the family. Sadly, the cost of the insurance products that they offer for protection is too high.

Insurance agents face a dilemma. If they offer the products that are good for consumers, they are not able to earn a high income. They can only earn more by selling products that "rip off" the unsavvy consumers.

Some insurance agents are honest and ethical and genuinuely wish to give the right advice to their customers. However, customers are not willing to pay an adequate fee for the time that is spent. And these insurance agents are not able to get sufficient business to make give an adequate income.

What is the solution? The growth on online portals that offer insurance directly is one useful step. Another important step is for consumers to be educated about financial matter. They can join FISCA (http://www.fisca.sg/) and attend the talk on financial planning offered by FISCA.

Consumers can also get useful tips from my book, Practical Guide on Financial Planning.

Tan Kin Lian