Passive Income for Life

Protection Planning ought to be seen holistically in terms of financial planning. The core concepts of financial planning consists of:
a. Wealth Protection (protecting what you have now)
b. Wealth Accumulation (getting more than what you have now)
c. Wealth Preservation (protecting what more you have gotten)
d. Wealth Distribution (efficiently giving away all that you have got)

Without financial planning holistically, protection planning can be done wrongly or less effectively. The common mistakes of protection planning are as follows:

Mistake 1: No claim = “wasted premiums” paid
The idea of buying an insurance policy is to protect oneself and not to be seen as profit making. Premiums are paid for a peace of mind and a good payout lest anything happens. Though it does not make sense to pay for something that you don’t want happening, it’s the possibility of it happening that you want to guard against.

Mistake 2: It gives me better returns if i buy this for protection
Many are lured by returns hence often opt for endowment policies to protect themselves. It has to be understood that endowment plans serve for wealth accumulation and not protection. Their payout can be good in the long term if nothing happens but their coverage is poor compared to a whole life or term policy. If you want to protect, buy protection. If you want to earn, buy investment vehicles.

Mistake 3: Switching endowment plans would give me better returns
Do note that there is a cost in changing plans often, just like how sales charges erode returns in fund switching. You have to read the terms and conditions properly between the 2 policies you would like to switch from and to.

Mistake 4: Investment-Link Products (ILP) are guaranteed
One has to understand that ILPs have 2 components to them: the insurance premiums and the investment portion. ILP takes the returns from the latter to fund the former. As one age, the premiums get higher. The investment portion is dependent on market conditions and the underlying unit trusts’ performances. In a way, you are funding a certainty with an uncertainty. It is a possibility that at an old age where premiums are very high, the returns might not be able to fund the insurance component, resulting in the policy to lapse and leaving the policy holder with no protection. This is one reason why the financial savvy separate the investment and insurances portions buy buying unit trusts and term policies separately themselves.

Mistake 5: Guaranteed returns of participating plans
Do note that the Total Returns (the one most consultants highlight) comprises of the guaranteed and non guaranteed returns. The latter is merely a projection by the insurer but is actually dependent on market conditions. Returns can be actually very low in downturns.

Mistake 6: Insufficient coverage
The sad thing is to see people buying several policies covering the exact same thing but leaving other parts unprotected. I would term this “mal-insurance”. It’s like having an unhealthy diet. You consume too much of one thing (fat or sugar) but lack other nutrients. Overall, you have poor financial health in terms of protection. So do your research and have a good coverage in all areas in terms of life, disability, hospitalisation and accident.

Mistake 7: I can get insured anytime I want
Most people would think the reasons to get insured as early as possible is to get covered early at a lower cost. But the main issue is more of insurability. Here’s a personal experience. At the age of 16, I suffered a shoulder dislocation which has been recurrent ever since. This has resulted in me not being able to be covered for my left shoulder and arm for the insurance policies i have taken after. The idea of getting insured early is to ensure that you can get covered for any pre-existing conditions that might occur in the future. Not many people see this.

Mistake 8: Covering my children is more important than covering myself
Just like in the flight safety videos that are screened when you sit on any plane during take-off, it is always played that you ought to put on the oxygen mask for yourself before putting them on for your child. The reason is because only you have the capability to take care of you and your child; your child cannot do the same. The same concept applies here. Only you can afford to pay premiums on both your policies.

Mistake 9: Taking an Automatic Premium Loan (APL)
There are 2 disadvantages to this. First, the interest rate charged on the loan will eatup the cash value that you have build up over the years. Secondly, inflation has also a eroding effect on the coverage. Both factors in APL will compound their effects in making your policy worth less.

Mistake 10: Thinking that Disability Income is Total Disability Coverage
Simply stated, you don’t have to be TOTALLY disabled to claim for disability income. This is dependent on the policy you have taken up.

Mistake 11: My financial consultant can do everything for me
Ah HA! Gotcha. Mistakes in protection planning goes beyond these 1o mistakes above. The most important thing one can do for oneself in financial planning is to know your stuff. Besides, only you know yourself best, not your financial consultant. Your consultant ought to be seen as a person who can add value to your process of financial planning and perhaps to cover the holes you might not have covered. He should not been seen as a total outsource. Though some financial consultants are altrusitic, they also have a profit motive as well.

*This post is adapted and further explored upon from the Invest Magazine, an article by Eng Tiang Chuan, Jun 2008