When it comes to financial suicide, people are fantastically inventive.
Credit card rollover? Check.
Buying brand new Audi after the first paycheck? Sweet.
Importing a real horse and cart for a wedding? Touche!
Most of us know that this list can go on and on, but most of us also think of financial suicide as some form of overspending in general.
Yet there are little-known ways of committing financial hara-kiri using insurance too. Some of these methods are so insidious that you may not even realize yourself falling prey to it.
Until of course the blade is halfway through your spleen.
We have compiled a list of top 3 ways that people can disembody themselves financially using an insurance blade – kindly do not follow suit, and for the love of God, please do not try this at home!
1. Not understanding what insurance you are buying
We get it. The modern person is busy and time starved.
Who has the time or attention to pore through detail upon detail in the benefit illustration?
Why strain your mental faculties to understand what you are signing on the dotted line for?
Afterall, isn’t insurance generally a good thing, and surely it cannot be that bad when you are purchasing insurance right?
If you enter into insurance contracts that you have a vague idea about, you may be in for a nasty shock when you actually need to claim / surrender that policy.
Does the critical illness cover extend past age 65? Will the policy cover recreational sky diving while you are in New Zealand? What is the difference between a Whole Life Plan or an Investment Linked Plan? After all, both of them cover the same events and may also provide returns after a certain period of time.
By getting clear on what your policies are about, you are able to judge better on their suitability and financial viability at your current life stage. You won’t be paying for insurance you don’t need, and will be getting exactly the coverage you actually require.
Real Life Equivalent: Sliting your wrists then soaking in a warm tub
Most glorified way of suicide, and also the most popular.
2. Overbuying certain types of Insurance
Sometimes we harm ourselves in subtle ways that we don’t even notice. If an apple a day keeps the doctor away, then popping a multivit while downing a carrot shake should keep that doctor on Mars, right? (Excessive vitamin C isn’t too harmful, but still it can cause nausea – and carrot shakes are not cheap.)
Switching that analogy over to insurance, the vitamin C equal could be the endowment plan (savings plan). It’s popular because it provides a certain amount of cover, and is an avenue to invest and grow wealth in a relatively safe fashion. I mean, who doesn’t like safe investments?
But that is hardly a good reason to pile on policy after policy. The 2 main reasons why this may backfire is that:
A) When you overcommit on premiums, you run the risk of not being able to afford them during tough periods (losing a job or contracting a serious illness). These policies might then lapse – meaning all of their benefits go down the drain.
B) Buying too much of one type of insurance leaves you vulnerable to lack of coverage. For example, although endowment plans do provide cover, it is comparatively low. The same dollar spent on a Term plan could yield as much as 20X coverage, while the Endowment gives approximately 1.5X coverage.
Real Life Equivalent: Overdosing on Sleeping Pills
In controlled doses, sleeping pills are beneficial. Not so much when consumed by the bottleful.
3. Taking care of Investments before Insurance
This is my pet peeve when it comes to financial planning, summed up in two words: Misplaced Priorities.
Yes, investments are sexy as hell. They represent a rosy picture of double-digit returns year on year, early retirement, and a private island on which you have your own resort (or castle, if you prefer).
Insurance, in stark contrast, is the ultimate turn off. It represents obligation, an expense which at best may turn into a meagre return, if any at all. What happened to your island?
This is actually all well and good. Investments are an essential part in achieving financial stability, and even financial independence.
Picture this: Your stock broker emails you about the next hot IPO. It has potential to attain 3X returns within the same number of years. Heck, it’s touted as the next Uber and AirBnB – who doesn’t want to get in on the action for those companies?
Meanwhile the insurance proposal lies untouched on your dining table. Two years later, you uncover a tumour during a routine medical check up. Treatment starts at the low six figures at least – and you have no valid insurance cover. And you end up selling your shares prematurely. Its a financial disaster.
Insurance is the non sexy bedrock upon the glorious financial castle is built. By taking care of investments first, you are shortchanging yourself and weakening your financial position. If anything untoward were to happen to you, your investments may have to be liquidated in a hurry – and often at a loss.
Real Life Equivalent: Jumping out of an aeroplane – then checking for a parachute
This is largely self explanatory.
So there you have it.
Now that you know better, please spread the word and help others as well. Prevention is merely a click away.
Know any good ways to commit financial suicide? Please do share in the comments below!
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.