Some things go fantastically well with each other.
Like coffee and cake.
Like children and dogs.
Like Vodka Martinis and James Bond.
Some people claim Insurance and Investment go fantastically well together too.
At this point, I spew out my coffee in disbelief and prepare to launch into a nonsensical tirade for the next 25 minutes, preparing to throw in the occasional vulgarity if needed.
But for some reason, I think of the suave, sophisticated English spy. How would Bond handle the situation?
Immediately my heart rate slows and I set my mug down on the table.
Why, he would first explain, calmly and concisely, what exactly is “Insurance mixed with Investment”. Then proceed to highlight why it’s not a good idea, both on the Insurance and Investment front.
The dastardly wink and cheeky smile would come last.
Not at all a bad way to convince and persuade. Let me try it now.
For the remainder of this article, I shall ask you to imagine me decked out in a perfectly cut tux, with a deep champagne goblet nearby. Come on, be a sport.
What is Insurance mixed with Investment?
It refers to the Investment Linked Plan (ILP). Its proponents wax lyrical about its flexibility, (potential) high returns, and all round usefulness of the plan compared to traditional Insurance products (Term plans, Whole Life Plans etc).
How it works:
You pay a set amount of premiums regularly (usually monthly).
One portion of it goes to insurance.
The remainder goes to buying investments. Different insurers offer different funds, or unit trusts.
You have the flexibility to adjust the portion that goes to insurance, and hence also adjusting the investment portion. More to Insurance means less for Investment.
At first glance, you notice that you get Insurance cover, and you also get to Invest.
Here’s where the fantasy stops and it all goes downhill.
Why the Insurance Part sucks
Insurance is meant to reduce your financial risk, a risk management tool. Investments are meant to increase your financial risk (and hence get rewarded). See the inherent dissonance?
More importantly, the Insurance Cover portion is not fixed for many ILPs. It fluctuates according to the investment performance of your fund performance. This is not what you want out of insurance. You want certainty. You want a guaranteed Sum Assured that suits your financial liabilities, and provides for your dependents when you are unable to.
If your investments tank (oh yes, it can happen), then your insurance cover evaporates. Where’s the umbrella you need then?
Also, the amount of Insurance cover provided is nothing to shout about. Some ILPs only provide a minimal amount of cover, up to 101% of your total fund value or amount invested (we call those 101 ILPs). That’s basically saying, the entire plan is about investment – with nary a shred of protection.
The last time we checked, Insurance is about sharing risk and minimizing it. Not taking it all the risk yourself (Self-Insuring).
Why the Investment Part sucks
In 2 words – exorbitant fees. Take a deep breath and say all these quickly:
Distribution Fees – Account Maintainance Fees – Policy Maintainance Fees – Administration Fees – Investment Management Fees – Early Encashment Charges – Fund Management Charges – Other Charges, Fee, and Expenses deducted by specific Funds
I counted in one particular plan, all these charges amounted to approximately 10% annually. So if the fund grows by 10% in value, you get a big fat zero. See the problem?
For the sake of comparison, I shall risk bragging a little here. I invested heavily into the STI during the 2008 period, when it was around 1600 (the lowest it reached was around 1400). Today it is around 2800, translating into an annual compound growth of “merely” 6%. (I actually more than doubled my initial investment, through steady dividend returns)
If I had placed my money in an ILP, it would have performed magnificently… as a bank savings account. Or worse.
The second major reason why it sucks: You are locked in and committed to a monthly amount. In some cases, that period can be up to 30 years. For Insurance, protection is an ongoing need, and hence necessary to be locked in. But for Investment, locking yourself in isn’t a terribly clever idea.
007 recognises the benefits of Dollar Cost Averaging, but he only wants to do it on his own terms.
And lastly, one Insurer can only carry that many funds. Why restrict yourself to just a subset of funds, or even just funds?
There are stocks, bonds, property, and a whole world of investment options out there. (Bond’s favourite: Wine)
So don’t mix Insurance with Investment
Just like you don’t mix business with pleasure, do not mix Insurance with Investment.
Go to an insurer purely for your protection needs – they excel in that.
Go to an online broker, property agent, etc to explore options for investment.
By separating the two, you maintain control.
You have certainty over your insurance cover.
You can decide for yourself which investment vehicles are suitable, and vary the amounts accordingly as and when you like.
Doesn’t that sound more like the best of both worlds?
That’s me done. Bond would be so proud.
Think I’ll wear the tux for a little longer.
www.ClearlySurely.com aims to eradicate the knowledge gap between consumers and Life Insurance. Our Vision is that one day, every Man, Woman, and Child will be properly insured.