Instead of paying a hefty sum on insurance premiums, there are ways to pay lesser and still get a higher coverage. You would be surprised many of us are actually under-insured even when we are paying so much for insurance premiums. Let's look at how this happens:
Paying A Lot Of Premiums but under-insured
Case 1: Buying too much endowment policies
You may have heard of endowment policies or even have one of these, but what exactly are these policies and how much coverage you are getting?
Endowment policies are basically more of a savings plan. The death or critical illness coverage is very little as most of the premiums are put into a fund to earn about 2-4%. Basically, if you pay about $100/month for an endowment policy, the coverage you would be getting will be less than $50,000. For my own endowment policy which I bought many years ago while I was still a student, I pay $80/month and get only $12,000 death and critical illness coverage. This really isn't a lot of insurance coverage.
Case 2: Buying too much Whole Life Insurance policies
Another popular insurance policy is whole life policy which many people have today. This policy is so popular because insurance agents push it out so much arguing that we need insurance coverage for life.
However, if you have this policy, chances are you would be paying a lot of premiums for this policy. A simple comparison on a local insurance comparison portal shows that for a $100,000 death and critical illness coverage, the premiums would be around $2300+ per year. This is about $150-$200 per month. $100,000 death coverage is really little so most likely we will be getting $200,000-$500,000 insurance coverage. How much will the premiums be?
For the $200,000 whole life insurance policy, the premiums will be about $4800+ per year.
For the $500,000 whole life insurance policy, the premiums will be about $14000+ per year.
If you're paying about $400-$500/month for whole life plans, the coverage you would be getting will only be around $200,000-$300,000. Is this enough for your dependants or your family if you pass on?
Mixing up insurance with investments
From the above examples, it is clear that the wrong policies bought will result in undermining the true purpose of insurance which is to insure us. There are so many policies in the market but which should we look into to get the most out of our insurance needs?
The problem with being under insured is mixing insurance with investments. Every $1 we pay for an endowment plan, only 10 cents may go into insurance while the rest of the 90 cents goes into a fund for investment. This is similar for whole life plans. This is the reason why the insurance coverage can be quite low even though the premiums we pay is higher.
If we want to get higher insurance coverage, we should look into term life plans instead. Term life plans are true insurance policies with the purpose for insurance only. There are no investment elements in it. We would get the highest coverage for every premium we pay.
The Attack On Term Life Plans
However, term life plans get attacked and branded "not a good plan" most of the time by insurance agents. There are good insurance agents around who advocate the best for their clients so I have to clarify this does not applies to all.
There is no one size fit all approach. Each of us will have different insurance needs and yes term plans may not cover for life so we can get additional minimum whole life insurance for life coverage.
Why term plans are not that popular for insurance agents to market out is simple because of the commission structure. For the first time, the commissions of insurance agents will be revealed in this post, credited to DIYInsurance for writing an e-book to defend term insurance. You can download the free e-book here on term vs whole life insurance.
In the e-book, various scenarios were listed out to compare the premiums and agent's first year commission. Here's a scenario for insurance plans to cover $500,000 death/TPD:
|Term Plans Premium||Traditional Whole Life Plans||Whole Life Hybrid Plans|
|Company A (Premium p.a.)||$1,922||$15,670||$7,410|
|Agent's First Year Commission||$748||$7,052||$3,335|
As we can see, the premiums for terms plans are definitely much lower as compared to traditional whole life plans for the same amount of coverage. This also means the agent's commission will be much lower too.
In just one example, we would have seen why there is always selling pressure for whole life insurance as compare to term insurance. This article may get more attacks but I hope it benefits consumers as a whole. The next time you get your insurance, think of it solely for your insurance needs first. For investments, there are many other ways to invest like all the many articles I've written. For insurance, getting term insurance to cover most of our insurance needs seems more practical to me. Nevertheless, we can still get some whole life plans to complement if needed.
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