Mr. Wilfred Ling, the FA Associate Director of Promiseland Independent Pte Ltd tells us why Singaporeans Are Underinsured despite paying hefty premiums. He shares why an individual who paid more than $80,000 in annual premiums was still underinsured. He answers the following questions:
- What is the average life insurance that a typical working adult should have?
- What are the reasons for underinsurance?
- Senior Minister Goh said that the insurance adviser plays a critical role here in product recommendations. Can you elaborate?
- What is your advice for consumers?
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Harold: Hi, I am Harold Toh. Welcome to this episode of Finance 1-on-1.
Joining us today, we have with us Mr. Wilfred Ling, the FA Associate Director of Promiseland Independent. Mr. Ling is a professional financial practitioner experienced in managing wealth for high networth and sophisticated mass affluent families. He is a Chartered Financial Consultant and coaches a team of financial advisers and planners. He is here today to discuss with us the problem of underinsurance.
Good morning Mr. Ling.
Wilfred: Good morning.
Harold: Wilfred, there have been reports that Singaporeans are underinsured. What is the average life insurance that a typical working adult should have?
Wilfred: There is no standard amount of life insurance that a person should have because each person’s needs are different from others.
In 2007, NTU was tasked by the Life Insurance Association (LIA) to conduct a research and survey on the subject matter. According to the survey, the average life policy require for a working adult was $480,636. However, the working adult was estimated to own, on an average, of only $118,639 of life insurance then. This means an underinsurance by $361,997 or 75% of the required protection.
Harold : What are the reasons for underinsurance?
Wilfred: I can think of two reasons why the working adult is underinsured.
The 1st and the key reason is price deterrent.
In the 2007 survey, it was found that the key reason for non-ownership of life policy was the perception that life insurance was expensive. This is particular so for lower income group. Unfortunately, it is the lower income group that has the greatest need for life insurance.
Price being deterrent was echoed by Senior Minister Goh Chok Tong on October 2010.
He said “the more likely reason [of underinsured] is the perception that getting the recommended amount of insurance protection is costly and beyond their means. Hence, it is given lower priority amidst other more pressing financial commitments like housing, children’s education and other day-to-day needs.”
This brings me to the 2nd reason why the working adult is underinsured which is - wrong priorities.
It is likely due to complacency that nothing will go wrong.
The consumer tends to put a greater focus on savings and investments at the expense of protection planning.
As a result of desiring some cash return from their insurance premiums, people tend to buy life policies bundled with saving or investment elements.
This causes life policy premiums to be high. That is why premiums for insurance seem to be so expensive. But actually, the majority of the premiums are for savings, not insurance.
I want to share a couple of real cases I encountered.
I met a young person who told me he was thinking of terminating a policy he bought one year ago.
After doing a cash flow analysis, I realized the reason. He was facing a negative cashflow.
Apparently he bought the life policy one year ago because he was attracted by the savings element of the policy.
He had $300 of surplus cash flow every month one year ago. His agent recommended a policy and use up his entire surplus cash leaving him with no surplus cash to save.
After a year, he was facing a higher expenditure due to greater family commitment and he could no longer afford the whole life policy.
The irony was that he was still underinsured despite the hefty premiums.
If he had bought a term policy, it would have only be just $83.30 per month at a much higher sum assured and therefore fully insured with no shortfall.
This is not the only story of paying hefty premiums.
I encountered a case in which a person paid more than $80,000 annual premiums and yet was still underinsured.
Apparently, majority of the premiums were for savings and investments.
The average premiums that my clients pay before they got to know me were about $20,000 to $30,000 in annual premiums because their agents recommended policies with high savings and investments. As a result, they remain underinsured despite the hefty premiums.
Harold: Senior Minister Goh said that the insurance adviser plays a critical role here in product recommendations. Can you elaborate?
Wilfred: Yes, insurance advisers are the first line of contact with the consumers and have the greatest influence over what they purchase.
However, there is a tendency for advisers to recommend life policies with high savings elements because of two main reasons:
First, it is easier to close the deal for such plans because their prospect tends to like savings policies as I had just mentioned.
Second, commissions are much higher for such saving plans.
If a term insurance would to earn just $100 in commissions, how many cases an adviser must close just to earn $3000 per month? He needs to close 30 cases.
But for every case which the adviser closes, he needs to meet 20 prospects assuming closing ratio of 20:1. Thus, he need to prospect 600 prospects per month!
If each prospect takes up 3 meetings, he need to have 1,800 appointments per month or 60 appointments per day assuming no off days!
As it can be seen, it is mathematically impossible for the adviser to earn a living just to sell low cost insurance.
If a product generates $3000 in commissions, the adviser just needs to close 1 case per month.
Harold : The final question, what is your advice for consumers? [pause 5]
Wilfred: Consumers must be aware of financial advisers pretending to be financial advisers. They may be regulated and appear to be doing a good job but the outcome is a bad job. The latest statistics provides plenty of evidence of this.
In the second quarter of 2010, 72 per cent of the life insurance applications were sold through full or partial fact find.
In layman terms, it means that the life policies were sold based on needs of the clients.
However, the average sum assured for regular premium sold was a pathetic $53,535. How long can a family last with this pathetic sum?
The lesson to learn is that the financial adviser may appear to be doing a good job but the product sold is still not suitable.
My advice is that consumer must do their research to seek out ethical and professional financial adviser. Professional financial adviser does not provide free advice as they also need to earn a living.
Consumers must be prepared to pay for advice directly or indirectly.
Harold : Thank you for your time.
Wilfred : Thank you for yours.
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