Keep insurance, investments apart

The Sunday Times
Jonathan Kwok
19/1/2014

If there is anyone in the financial services game we love to hate, it's credit card salesmen and telemarketers, although it's safe to say that insurance agents have a place at the top of the list too.

What rankles is that they take their commissions from the premiums we fork out, so it's in their interest to recommend expensive policies that we do not really need.

But - and this also rankles - we need these guys.

We need to go through them to buy most forms of insurance and we have to contact them for claims when something goes wrong. We also rely on them to assess our financial situations, explain complex product features and give sound advice.

So here is the dilemma: On the one hand we need agents to advise us but, on the other, we sometimes have good reason to doubt the advice they dispense.

I cannot see an easy way out of this one.

"I don't trust my agent," one reader told me last week. "She's representing her company and, if there is another product out there that is better, she won't tell me."

The reader added that many so-called independent financial planners get commissions from the insurance firms so there is reason to doubt them too.

So you can imagine how excited I was when I found out that a cousin was working part-time as an insurance agent during the recent university vacation.

It seemed a perfect opportunity to find out more about the sector. After all, as a family member, he was duty-bound to tell me the truth, right?

"So what type of products do you get the highest commissions from?" was my first salvo when we met recently.

"ILPs," he told me after thinking for a while, referring to investment-linked insurance plans. "Endowment plans are not bad too."

I continued: "So what gives agents the lowest commissions, then?"

That would have to be the private plans integrated with MediShield, he said.

I learnt that agents have a schedule of commissions when they sell products - meaning they get different percentages of your premiums. Some products charge much higher premiums, benefiting agents and the companies.

Of course, agents are not inherently bad people - it is just that the industry's structure exposes them to serious conflicts of interest.

So while it's in our interest to pay as little in commissions as possible and yet cover our basic insurance needs, how do we actually do it?

First, we have to remember the roots of insurance.

Insurance really exists because we humans are "risk averse", as economists will tell you.

That is, we terribly dislike the small chances of things going really wrong, such as dying in an accident or getting cancer. Such events will wreck our lives and our finances.

People are willing to pay money to avoid risks. It is impossible to totally avoid accidents and disease, but you can buy insurance to ensure they do not wipe out your savings.

The minority who are stricken will get a huge payout to tide them through from the pool of premiums that others have contributed.

Those who lead healthy and happy lives to a ripe old age get nothing.

I am perfectly okay with my insurance premiums going down the drain - as long as nothing happens to me.

I understand that insurance exists to help people reduce their risks and not to help them save or make money. Many policies still serve this basic aim.

The national health-care insurance plan MediShield is an example, as are the private integrated plans. The policies help you with hospitalisation costs. However, they do not pay anything if you do not stay in a hospital but die in an accident, for example.

Other examples of basic insurance include term-life policies - which pay out if you die or are disabled within a timeframe - and critical illness ones that pay out only if you get certain diseases.

These may not be dirt cheap but will cost less than more complex products.

Alas, many people do not like seeing their insurance premiums disappear so the industry has developed bundled products that offer savings, investment and bonus elements.

The premiums tend to be much higher, with a good chunk going to agents and companies as commissions and profits.

You may get back more than what you put in but if you had used the cash to invest on your own, you would have spent less on costs and probably grown your money more.

Such complex products are very popular here - about 72 per cent of new policies sold in 2012 were "bundled" policies, according to data from the Life Insurance Association of Singapore. ILPs, whole life and endowment policies all fall here.

The next time you come across a product, ask yourself if it is just insurance - or insurance trying to do too many things. As the saying goes, you would do well to just "buy term and invest the rest".

A colleague told me that he will avoid endowment plans in saving for his young daughter's university education but is considering a plan offered by a local bank that allows him to invest regularly in a low-cost stock index fund. He will supplement this with basic insurance for his child.

Another thing to remember is to try and find an agent you can trust.

My peers opt for more experienced agents, who tend to be more stable financially and hopefully less profit-driven than eager young ones just starting out.

They will also have more experience with products and claims although, of course, the responsibility of choosing the right policy still lies in your hands.

The industry is in the process of reform after the Financial Advisory Industry Review recommendations, and we can look forward to the changes.

By the middle of this year, you will be able to skip the agent and buy basic insurance directly with a nominal administration fee. Hopefully, this will mean cheaper insurance as you save on commissions.

A comparison website will also be launched by the end of the year so you can compare features of different policies.

These reforms could solve consumer concerns surrounding agent commissions or insurers' profit levels, which some see as excessive.

But for individuals, financial knowledge is the best weapon. Arm yourself with it and you will be able to handle it the next time an agent tries to sell you a policy.

jonkwok@sph.com.sg