Why I don’t buy life insurance policies

Posted by Lee Chee Keong on 26/12/2009 under Chee Keong, Finance | Be the First to Comment

I don’t own any life insurance policy save for the NTUC Medishield which I bought using CPF money.

Life insurance policies can be broadly divided into 2 main types, namely particpating policies and non-participating policies.

A participating policy is an insurance policy that participates in the profits of the insurance fund, for example a Whole Life Policy or an Endowment Policy. They typically pay a yearly “bonus” or dividend.

A Non-Participating Policy is an insurance policy that does not participate in the profits of the insurance fund, typically a renewable term insurance policy.

Here are the reasons I don’t buy participating insurance policies:

1) The premiums are too high;

2) The insurer may cease operation or go bankrupt;

3) I don’t believe in “forced savings” for the following reasons:

a) If I become unemployed, or am unable to service the monthly premium for whatever reason, I stand to lose up to 90% or more of the premiums I’ve already paid, especially during the first few years upon purchasing the policy;

b) The “bonuse rates” or dividend rates of participating insurance policies (eg. whole life or endowment) are non-guaranteed. Furthermore, the rates are unattractive to me;

d) If I should need to withdraw the money prematurely for whatever reason, I may not be able to do so without a paying a heavy penalty. To surrender the policy would mean I stand to lose up to 90% or more of the premiums I’ve paid. To borrow against the policy doesn’t make sense to me since I will have to pay interest for borrowing against my own “savings”;

4) Most participating insurance policies only pay the insured upon what is known as a “total and permanent disability”, which typically means I only get paid if I lost two of my eyes, arms or legs. What if I lost one arm, one eye or one leg? I don’t get paid at all, even though the “partial” disability can be just as devastating financially. Needless to say, it’s many times more likely for a person to sustain partial disability than “total and permanent disability”. Meanwhile I still have to continue servicing the insurance premiums on top of the medical bills I’ll have to pay out of my own pocket. Of course, I can add a “rider” to cover the partial disability but that would mean I’ve to pay a higher premium. A term insurance policy would be a much cheaper and better choice to insure against a partial disability. Also, an insurance rider to cover “critical illnesses” typically pays only upon the end stage of an illness, for example, the end stage of cancer. That means I won’t be paid the moment my illness is diagnosed. Meanwhile I’ll still have to pay my medical bills and continue servicing the insurance premiums.

Investment-linked Policies (ILPs) are essentially professionally managed investment funds (can be likened to Unit Trusts) that comes with insurance benefits. Studies have shown that the majority of professionally managed investment funds consistently underperform market indices over long periods. I would rather invest the money myself or buy ETFs instead.

In my opinion, an insurance policy is a lousy vehicle to save money. Insurance can and should be used solely for insuring against unexpected medical expenses.

For such a purpose I would rather buy a non-participating, plain vanilla term insurance policy, which comes with the following benefits:

i) A much lower premium than a participating policy;

ii) I can stop paying the premium any time I want with minimum penalty;

iii) I can get a much more comprehensive insurance coverage at a much lower price.

I’ve often heard stories about people who over-commit to expensive life insurance policies only to give up halfway resulting in financial loss which often adds up to a few thousand dollars or more. In fact I myself was one of the “victims” in my younger days.  =)   I hope that readers of my blog would be able to avoid the costly mistakes I myself and many others have made.

You may want to read more insurance related articles in Mr Tan Kin Lian’s blog.