Some time ago I spoke to a friend whose brother was in a coma due to hemorrhage in the brain because of a stroke. He was in coma for many months already. I understand that he was in his late thirties, got two primary school children and has a wife who was a homemaker. The coma now qualifies under total and permanent disability. Hence, the patient qualified to claim Dependent Protection Scheme (DPS). Unfortunately that’s the only insurance he had!
The claim amount was around $46,000 which will last for less than a year. As a result of lack of insurance, the family was financially devastated and completely ruined! I asked my friend why the sole-bread winner did not buy any insurance? I was told that he did not "believe" in insurance and always thought nothing could ever happen. Actually total and permanent disability (TPD) is extremely difficult to claim because the probability of claim is extremely low for a relatively young person (I consider 40 years old as very young). For those who studied statistic, the probability of being low is not equal to zero because Mother Nature offers no favoritism. This is my first time coming across an individual who qualifies to claim TPD. But I do not take pride in any of this knowledge because I am saddled to hear that the family is completely ruined.
But what many people do not know is that this particular family’s situation is a representative of the majority of the way parents handle their own family. I estimate that 99% of parents in Singapore are totally irresponsible in the way they handle their own affairs as if they are still bachelors and spinsters thinking they are only living for themselves. Many parents behave as if their children are just a mere commodity worthless of any value. Why do I say this? Here are some things which parents do or do not do (click the headings to expand):
1. Total lack of Insurance
On one extreme are parents who completely do not insure themselves. They think nothing will happen to them. I felt this group of parents are selffish and self-centered and they only think of themselves. It does not matter what their opinions are with regard to insurance. It is more important to think of what will happen to their dependents if something happen to them. When an individual become parents, they do not realised that they have lost their ability to make decision for themselves. They no longer live for themselves because they have children whose life and future completely relies on the parents’ provision.
Why is it that people are willing to spent nearly $100 a month on mobile phone, cable TV and internet but are not willing to spent a single cent on insurance? There are people willing to spent $500 to buy an iPhone when it was first launch but spent zero on insurance? They probably thinks that the mobile phone plan, TV and Internet are more important than their own children. In other words, they treat their children like a commodity. Thus, such parents are self-fish and self-centered and only think of themselves.
So how much would an insurance covering death and TPD cost? Few weeks ago, I transacted a case for my client of sum assured of $1,000,000. He wanted to do some estate planning but I found that he does not have much money for his estate. So I proposed a $1,000,000 sum assured term insurance covering up to age 59. He is currently age 33 (last age). The monthly premium is just $128.50. This is not a group insurance which can terminate itself any year. This is a plain-vanilla term insurance which he personally owns and cannot be terminated by the insurer. He was shocked by such low premiums. Despite some pre-existing illness, the insurer accepted the case as standard. How much is the commission? As this is a term insurance, the commission is negative after net of expenses. Fortunately I am fee-based and hence I do not fully rely on commission to earn a living and hence the negative commission is not of concern. But it is of very real concern for commission-based advisers and hence they would instead recommend a $100,000 whole life policy which earns a much higher commission to the detriment of their clients.
2. Buying too much insurance
This is the other extreme in which parents buy just too much insurance. For some strange reasons, many insurance salespersons think that their insurer is a bank and fund manager. Thus, there are people who actually use insurance to put their savings (like putting money in a bank deposit) and use insurance to invest. I just cannot understand why they think the insurer is a bank and a fund manager. An insurer provides insurance. I think it does not require a person with very good English to know that an "insurer" manufacturers insurance products. I do not think any English dictionary would say that an insurer is a fund manager or a bank.
Parents who save their monies into insurance products are like as if it is a bank and fund manager is being an irresponsible parents. Let me give a real life example of why this is so. A few years ago, a person called me to review his father’s insurance policies. The caller was a young man doing his National Service (NS) and about to go to University. His father bought an education endowment policy many years ago for the purpose of using the proceed of the insurance for tertiary education. But the young man read through the policy and found something fishy. So I was called to give my expert opinion on what his father bought. When I checked the policy, I found that his father bought a WHOLE LIFE insurance policy. A whole life policy is never meant to be terminated because it is meant to be covered for life. Terminating a whole life policy prematurely will have major financial consequence. Thus, his father was mis-sold a product. As a result of this mis-selling, the young man had to find other sources of money for his university tuition fee.
I did come across some old-time insurance agents who told me that this was exactly how they sold whole life policies. These whole life policies would be sold as like an "endowment". These insurance agents would tell their clients that they can terminate their life policy anytime and that the returns would be similar to a fixed-deposit. If they want to have continuous coverage, the policy need not be terminated. The "fixed-deposit" return was based on projections which in introspect were far below the expected returns due to numerous bonus cuts. These days, any insurance advisers who sell a whole life policy in this manner would have their license suspended immediately for misrepresentation and mis-selling.
In recent times, it has become so common for insurance advisers to sell investment-linked policy (ILPs). What they did not realised is that the Straits Times actually reported that the ILP is like a "time-bomb" and may not be suitable to some individuals. I do not know why that newspaper report was completely forgotten. If you want to read about that report, you can read it here: HERE.
Stay away from ILPs. Treat investment and insurance as separate.
3. Not bothered about children becoming orphans
It appears to me that many parents are not concerned with their children becoming orphans. They may buy lots of insurance but these insurance policies do nothing for their children unless there is an estate plan. For all they know, all the proceeds of the insurance would end up at the casino. How could this happen? Children who are still minors cannot own assets. As a result, any insurance proceeds will have to be handled by others who will be more than happy to gamble it at the casino. How does insurance advisers advice their clients on what to do? Here are some incorrect advice:
- Some insurance advisers tell their clients not to do anything because the law take cares of everything. The Interstate Succession Act stipulates that 100% goes to children if spouse is also dead. Because these children are still minors, the Administrator of the estate will be the trustee. But the Administrator can gamble at the casino and there goes everything.
- Some insurance advisers tell their clients to make a nomination either using 49L or 49M of the Insurance Act. The same problem applies because children who are still minors cannot handle assets and thus the insurance proceeds to them will have to be handled by the trustee/guardian and as a result could end up at the casino too.
- What will happen to the residential property if children become orphans? Insurance advisers have no solution to that except to sell another insurance called mortgage reducing term insurance or MRTA (i.e. insurance advisers can only sell insurance and nothing else). But a MRTA is only necessary if there is insufficient coverage. Thus, the MRTA may or may not be necessary. So if an insurance adviser say that the MRTA is a must, he could be mis-selling. In order to ensure that the residential property is used for the sole purpose of allowing the orphaned children to stay, an estate plan is required.
- How about guardian? The unknown guardian can physically or emotionally abused the orphans. It is better to appoint your own guardian and this can only be done through estate planning.
4. Only meet salespersons
The worst thing a parent can do is to only take advice from the salespersons. The objective of the salesperson is the make lots of money and the last thing is to ensure that the client’s goals are met. I don’t know why Singaporeans are so gullible. A salesperson must sell something in order to earn. Thus, there is a complete conflict of interest. Moreover, there are things which the client need which requires no product.
Although Singapore is well-known to be a "fine" city with strict laws, it is unfortunate that this does not apply for financial industry. An "O" level is all it takes to be a financial adviser. You just need to lock yourself for 1 month to study a few exams and you can advice on insurance and tell your client how to save $1m for retirement! Really? You can imagine how ridiculous the industry is. Instead of complaining that the regulator being incompetent, it is better for consumers to change themselves in the manner they seek financial advice.
In developed countries like United States, it is common to find financial planners who are truly professional and can advice on wholistic planning such as estate planning, insurance, investment, etc. For example, people who wish to say have their Will written, would go to the financial planner for advice first. In Singapore, nobody bothers in the first place as they are more attracted to free gift vouchers that comes with each insurance product bought. The last thing in their minds is to ensure their children do not reduce to becoming a mere commodity.
Parents who wish to take some responsibilities for their family’s sake should consult a professional financial planner.
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