I bought my first life insurance policy when I was just 19 years old.
I wasn’t quite sure how it worked. All I knew was that I was about to take up a government scholarship to study overseas. My parents were my guarantors, which meant that should anything happen to me, they might have to pay back whatever the Government had spent on my education.
My parents and I felt we had to insure ourselves against this possibility. There was also a general feeling that I might as well start buying insurance when I was young, since the premiums would be lower.
My dad had a friend who recommended his agent. We met her and, in the end, she sold me what I believe is called a whole life policy with a term rider.
The bulk of the premiums went into the whole life policy even though it covered me for just $30,000.
The great thing, the agent explained, was that the policy would ‘break even’ in a number of years, meaning that the policy would accumulate enough value to pay for itself. And in 20 or 30 years, I could even withdraw money from it.
The rest of the premiums went into the rider, which is jargon for an extra bit of coverage that attaches to the main policy. This would cover me for $250,000 – more than enough to repay the Government – for five years.
My parents initially paid the premiums, but I took over when I started working.
It was only years later, covering banking and finance news in The Straits Times, that I was finally in a position to make a good assessment of what I had bought.
I realised that the $250,000 rider was the portion of the policy that I actually needed.
The $30,000 whole life policy, which I still have, does not provide much cover at all. And it is probably cover of the wrong sort, for there is no one whom I need to provide for in the event of my death.
What I do need cover for is medical bills for when I’m still alive. But since I did not buy a critical illness rider, I am not covered for that.
I also finally understood that in these traditional whole life plans, the relatively high premiums are partially used to provide the cover, but the rest are invested in a fund that pays returns. This is why the policy eventually breaks even and later has a cash value that you can take out.
So what I really bought all those years ago was something more akin to a savings plan, with a small insurance element.
I’m not so sure that this was the best way that I could have invested all the premiums I poured over the years into the policy.
What I am certain about is that I did not need it all those years ago. I could have just bought a term policy for $250,000 for five years for a fraction of the cost.
I don’t blame the agent, who I think genuinely believed she was selling me something that I would need later in life – assuming, of course, that (a) I would eventually raise a family I needed to support and (b) that I would want a hassle-free way to invest my money.
In fact, my life could still change in a way that would make the policy more useful and relevant.
But I could not have foreseen any of this. The problem was that I was too young to have formed a clear view of where I was headed in life, and what I therefore needed from a life insurance policy.
People complain so much about insurance agents pushing products that they don’t need.
But much less is said about customers who haven’t really thought about what they want and buy policies for the wrong reasons.
So here is my own list of reasons not to buy an insurance policy, cobbled together from my own life experiences and those of my friends and colleagues.
At the top of my list: Don’t buy a policy just because your parents, relatives and the rest of the world all seem to have one.
People who do this are taking the easy way out. They don’t want to think through the complexities of life insurance and believe there must be ‘safety in numbers’.
When I finally went through a proper assessment of my insurance needs, it took more than an hour. My financial adviser asked such probing questions about my personal life, and my expectations of what I would require should I fall sick, that I felt like I was telling my life story to a psychiatrist.
Remember also that although there are broad categories of life insurance products, every company makes unique variants tailored to an individual’s unique circumstances.
If you are single, you need to ask whether you need to be covered for death. Do you have certain medical conditions that require special cover? Do you need insurance that pays for the mortgage of your house, and should that be a reducing cover that shrinks with the size of your loan?
Just ‘going with the flow’ assumes you have the same sort of life as everyone else and makes it an easy sale for your agent. Remember that he hasn’t missold you a policy if you did not tell him what you need.
The next rule: Don’t buy simply because you are young.
I have so many friends who bought policies that they couldn’t really afford to start with, and now don’t even need. And all because they were under the impression that it was cheaper if they started young.
Yes, it is true that you lock in lower premiums when you buy a policy in your 20s.
But for many people, a true understanding of their needs in life doesn’t come until they are more mature.
Is it worth that discount to get locked into a policy that may not suit you? Or is it better to wait a few years until you have a clearer view of yourself, your investment skills and the products on offer before you commit?
Finally, my last rule: Don’t buy from anyone towards whom you feel an obligation.
I understand that when insurance agents start work, they are told that the first people they should tap for business are their family and friends.
There is a simple reason for this: When an agent sells to someone he knows personally, he sets up the impression that he will help you and won’t give you bad advice.
The buyer believes this and is therefore less likely to question the advice he is given. In fact, he tries not to ask too many questions because he thinks it is rather rude. He ‘goes with the flow’, so the sale goes on more smoothly than usual.
That is all well and good if the advice is the best one to start with. But that won’t always be true, even with the noblest intentions on both sides.
Don’t get me wrong. Life insurance is an important product that everyone should probably buy. Whole life policies will be suitable for some customers, and cheaper term policies or obscure variants just won’t work for others.
But these are long-term products that need to be serviced for years, and often decades. And it would be tragic to chalk up these costly commitments for the wrong reasons.
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